ARNOLD KLING
August 14, 2011
The Top Political Contributors
August 11, 2011
Gender and the New Commanding Heights
August 11, 2011
Jamie Galbraith Makes an Assumption
August 11, 2011
Macroeconometrics: The Science of Hubris
August 10, 2011
Real and Nominal Bond Yields
BRYAN CAPLAN
August 14, 2011
The Effect of Thumb Sucking on Income
August 12, 2011
The Voice of Cold, Hard Truth to All Would-Be Educators
August 12, 2011
Ability, Morality, and Prosperity: A Paper and a Report
August 11, 2011
The Theory of Time and Frittering
August 10, 2011
Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
August 9, 2011
Hayek in "Unbroken", Part Two
August 8, 2011
Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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This story, and the explanation following it, are obviously flawed. There is a difference between the buyers of luxury goods and high-income people. Many high-income people scrimp and save and rarely, if ever, purchase or consume luxury goods. I know people like this within my family.
On the other hand, many low and middle income people consume luxury goods, many times financed by debt or by giving up other goods. For example, low income people in the ghetto wearing $200 pairs of shoes and gold necklaces. Teenage girls of middle income families buying dolce & gabbana. Numerous examples exist. As a full-time student, I shouldn't spend my meager income on luxury goods, but I occasionally do.
This article proves nothing at all.
This story echos a number of situations out there, as businesses both big and small have chosen to adopt this style of 'otimistic' financing, with consequences now all too obvious in hindsight. This has happened before and as usual history repeats itself. One wonders what effect these outcomes will have for the future of business financing - maybe very little, as people have short memories and incessant needs. Perhaps these events will act as an impetus for further developments in the area of Risk Management.
Maple Bank, Mr. Kassim's bank, has a Texas Ratio (one measure of bank credit risk) of 54. That's pretty high, and is a tough place to be for a bank with only $44MM in assets, so he may not be as conservative as he claims in the article. The average Texas Ratio across the 8274 banks in the US is 17 and the median is 8, using the latest FDIC figures available. But the story is a tough one. Borrowing from banks and friends and family, missed milestones, big dream piling up big inventory and big equipment.
But they should have had some caution, they paid $600M for a business that was losing $150M a year, so I can't be too sympathetic.
BTW, M above represents the Roman Numeral M for 1,000. Not M for 1,000,000.
High income people might buy more luxury goods, since lots of high-income professions require signaling. (You wouldn't hire a lawyer in a T-shirt.)
High net worth people tend not to be as interested in luxury goods. Quality, yes, but that's separate from luxury.
I have no idea if a falloff in luxury luggage means high income people are hurting. More likely, while it is often the fashion for them to do conspicuous consumption, right now the fashion for most is to do the exact opposite. From feast right to famine, do not pass GO.
Paying $600k for a business with only $450k in sales was the first sign of stupidity.