What is the Sequester?

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The term ‘sequester’ has been at the top of the headlines this week. It refers to the $85 billion in automatic spending cuts scheduled to commence today. Allow me to make a comparison using natural disasters and ice cream.

Let’s say you are a long-time owner of an ice cream shop in Joplin, Missouri. I choose Joplin, Missouri because their town was decimated by a tornado just two years ago.

It’s 2010 and business is booming – folks just love your ice cream and you are making improvements to your store’s appearance as cash flow allows, generally managing your debt well, and hiring only the best and brightest to serve up double scoops of both traditional and more exciting flavors. You are also staying on top of consumers’ demand for healthier options, and have recently introduced a line of fat-free ice cream as well as frozen yogurt options, both of which are being well received.

In May of 2011 a massive tornado touches down in Joplin (through no fault of your own) and though the store survives the neighborhood is all but destroyed. Summer comes just a few months later, normally the best time of year for ice cream sales. But something is wrong – the good folks of Joplin are focusing all of their efforts and discretionary income on rebuilding their homes and businesses. The nerve!

A year goes by and things are slowly improving. Kids are going back to the Joplin public schools, which have been completely refurbished; for the most part, homes have been rebuilt or restored; confidence is returning and small businesses are starting to recover from the lackluster year prior. It looks like business is even ticking up again. Unfortunately, over the last year you have had to take out loans against the ice cream shop and have had to let go of one of your four employees. What should you do next?

You have a few options, as I see it, which make your decision somewhat analogous to our current sequester debate:

Option 1 :: You follow your first instinct which, naturally, is to panic and assume that ice cream and desserts in general are an unnecessary luxury of the past. You decide to close your business immediately to mitigate any future losses. Keep in mind that your potential upside will be severely impeded by this strategy.

This is not an option that is currently on the table from either party, thankfully.

Option 2 :: For the first time in 40 years you decide to start ordering your cream, sugar, and additives from Cambodia in an effort to reduce overhead. You don’t think customers will notice the difference in quality and, sadly, you don’t really care because you are so excited that your monthly costs will be cut by 30%. In addition, you consider dramatically raising the price of your best-selling items. You plan on using all this extra free cash flow to start aggressively paying down the low-interest debt you have accumulated over the prior year – you don’t like “owing anybody money” after having been in business all these years. You do not take into account that customers may be turned off and look for other places to meet their ice-cream-eating needs, not to mention that the lost revenue and negative word of mouth could do irreparable damage to your long-term business prospects.

To me this is what the sequester really represents – drastic cuts to spending at exactly the wrong time. I don’ t think there are too many honest people that can still deny our economic recovery is gaining momentum. The $85 billion in cuts scheduled to commence tomorrow (if there is no agreement) would not have a positive impact on our situation in the intermediate- or long-term, in my view; its positive impact in the short-term is even in question. Would $85 billion be taken off our immediate list of liabilities? Yes. But what about the further consequences of that money not being spent by the consumers set to receive it? Is it a good idea to shave 0.5% off our GDP just as we are getting off the ground? No doubt we need to get spending under control, but this “shoot first, ask questions later” concept is all too reminiscent of Veruca Salt’s approach to life.

Option 3 :: You take a step back and survey your position. You review historical economic trends and, deciding that the storm is an isolated incident that is unlikely to have had a permanent impact on consumers’ demand for your product, you buckle up and decide to move forward. You understand that in doing so you may have to make some concessions (work longer hours to compensate for reduced staff; pay yourself a little less for the next year or two; and/or consider adding money to the business from personal savings). You believe in yourself and your ability to return your business to profitability, to bring back the employee you laid off and potentially add another part-time worker, and to maintain the presence your business has had in the community for generations. You remember from your previous successes that patience is a virtue. You don’t think you will succeed, you know you will….

To alleviate any remaining ambiguity, Option 3 is the approach I am endorsing here.

What are your thoughts? Your comments are welcome below.

Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main