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Welcome to the Third World, Part 9: Entrepreneurs Can’t Retire

John Rubino

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Sept. 3, 2012

For most small business people, the ideal life goes pretty much like this: a few years of all-consuming obsession to get set up, followed by a few decades of 12-hour days to build a reputation and client base sufficient to make the business valuable. Then sell out for enough to retire comfortably.

This is easier said than done, of course, since most small businesses fail pretty quickly. But over the past half-century it was common enough to be a realistic goal for generations of American entrepreneurs.

Today, not so much. When the pie is shrinking, as it has been since 2008, small businesses begin to cannibalize each others’ customers and niches, making each business less viable. Entrepreneurs find themselves on a treadmill where ever more work produces ever less reward, and the prospect of selling out for enough to retire recedes ever further into the future. Last Thursday’s Wall Street Journal published two long articles illustrating this process. Here’s an excerpt from one of them:

“Welcome to the Third World” series, this might be the most disturbing for a couple of reasons. First, entrepreneurs drive a modern economy. They come up with the ideas that change the world for the better, while creating millions of good jobs – and while working harder than just about anybody else, both for the love of what they do and in the expectation of a big pay-off down the road. Take that pay-off away and the rational choice for a lot of these people is to play it safe, put in fewer hours on less risky projects, spend more time with family and less at work. That’s great for the families but, in the aggregate, will make the US economy more like Europe, where jobs are scarce, innovation is slow, and most people depend on government jobs or handouts.

More immediately, entrepreneurs who can’t sell out don’t generate big capital gains, which means lower tax revenue for governments at every level. This creates a feedback loop in which bigger deficits lead to cutbacks in services and/or higher taxes, which make the business environment even tougher and business valuations even lower, and so on. Given the number of cities and states that are already functionally bankrupt, this might be the last straw for a lot of municipal credit ratings. So it’s only going to get worse for entrepreneurs.

And this is all happening with interest rates at almost surreal lows (today’s prime rate, on which many business loans are based, is 3.25%), which means that a solvent small business — or a would-be buyer thereof — has access to the cheapest money they’ve ever seen. And they still can’t seem to put it to productive use. What good is a bank loan if your customer base is shrinking?

The Fed is obviously aware of all this and understands that just cutting interest rates by another quarter-point or adding a bit more reserves to money center banks won’t energize small businesses. So look for something different when the next QE is announced.

http://dollarcollapse.com/welcome-to-the-third-world/welcome-to-the-third-world-part-9-entrepreneurs-cant-retire/