Is Lock Down the Answer?

This is the question and subsequent conversations I have with friends, family, my accountant, and my friend who is also my extremely well informed neighbor who is also my amazing business-consultant-bookkeeper (Shout out to Bill).

At the time of this writing, The United States is on a sort-of-non-effective-partial-non-mandatory-arguably-useless-lock down. Is this the answer?

You’ll notice in a lot of my articles, I reference the word hindsight many times. I try to put into perspective, and in the forefront of my readers minds, the fact that none of us can know the future. We can talk about educated guesses, but who could have predicted COVID-19 to the degree of how it’s affected our lives?

Currently we are doing a half-assed job as to what experts are expertly advising us (our administration) to do. We live in the United States. The land of the free and home of fake news and fake science and fake experts. We have arguably the Worst Administration in the History of Administrations to be handling something like this, which requires knowledgeable experts to assist us with tackling an issue like this. When we (the administration) dismisses these people constantly, what are the repercussions?

I am constantly reminded of the movie “Outbreak” with Dennis Hoffman. In the movie his superior is constantly bringing up the fact that in the past, Col Sam Daniels (Dennis Hoffman) has been wrong about some responses to possible epidemic and pandemic happening world wide. He gets challenged when he says the Army needs to alert the CDC and the WHO about the possible contagion they find in Africa. He’s been wrong in the past, what makes him think he’s right this time?

He’s admits, he’s been wrong in the past about some things, but he did predict a large scale outbreak that saved many lives, and he’s asked “so what makes you think you’re right this time?”

His answer – “He doesn’t. He freely admits that he might be wrong. So if he’s wrong, and they alert the public, then they’ve caused panic for nothing. But if he’s right, he saves many, many lives.

That’s the question we need to ask ourselves here. What’s worse? Over reaction and a possible economic meltdown or the loss of life? Hindsight will tell the tale, but right now, we just don’t know.

So the point of the article is to address the question. What’s worse? Not enough response, or too much?

The American Economy is not made for “Breaks”

In the past, we’ve had hiccups in economy, job losses, stock market upticks and down ticks, and recessions. We’ve gone through world wars, small viral outbreaks, and have been hit hard by political disparity and a divided country.

But we have never, ever been in a situation where businesses were forced to close their doors, effectively creating a complete economic halt on the local level. Let’s look at a few statistics:

1.) Most small businesses have about 27 days of reserve cash available before they run out, and are forced to take high interest loans to continue on with business in economic hardship.

2.) Most restaurants have about 17 days in the same scenario.

3.) Small Business accounts for 50% of the nations workers and economy.

Notice the words – “economic hardship”. Not an economic halt. Some money coming in is extremely different than NO money coming in.

There’s a very distinct trickle down effect that happens when you halt an economy like ours. We have social implications, like constitutional debate, and “you can’t tell me what to do” type of thinking, of which I’ll discuss briefly, and then you have the finance system that completely breaks down.

Social Impact

So I’m a small business owner of a few local business in my area as well as the owner of a software company and a few online ventures. I know the implications of this virus first hand, and am being hit extremely hard financially by the implications of this lock down we are going through at the moment in the United States.

My friends and family are a mixed bunch with some business owners, financial advisers, healthcare workers, waiters, waitresses, bartenders, managers, skydivers (yes, skydivers), and corporate workers. I’m not an expert in any field, but I know first and second hand how this is playing out for everyone. It’s really scary for most people on an individual level, but terrifying when you think about what’s going to happen to the economy as a whole if the government doesn’t step in to minimize the economical damage this shut down is sure to incur.

Government trust in the United States is at an all time historical low. Regardless of who you voted for, most people do not believe our government is in a position to get us through this situation successfully and are constantly reminded how ineffective they are at helping us in a crisis.

This will have serious implications on the future of how we choose our government officials and our leadership. We Hope.

The Good Stuff

Let’s look at some of the good stuff going on with how our government is responding.

First we’ve opened up unemployment to all W-2 employees, as well as 1099 contractors, and self employed business owners. This is really great news, and has in effect, given everyone a way to continue paying their rent and utilities during this crisis. Kudos to that.

If you haven’t filed for unemployment, most states have the ability to create a profile and apply online. In Texas, for example, there was a reason for the application – Coronavirus, which basically gave you an immediate approval.

On top of the unemployment paycheck available to those who lost their jobs recently, most people are also getting a stimulus check for $1200. The stimulus checks are given out to any taxpayer who files taxes in the years of 2018-2019. If you haven’t filed taxes in a while, go do it now. You won’t get a check otherwise.

If you did direct deposit on this year or last year’s returns, then you will get the stimulus money deposited directly into your account. If you didn’t, you’ll be getting a paper check which could arrive much later.

The stimulus check amounts are given as follow:

• Up to $75,000 filing single = Full $1200
• $75,000 – $98,000 stimulus amount is prorated to -$5 for every $100 above $75,000 you made, up to a limit of $98,000. Anyone making over $98,000, you won’t be receiving a stimulus check.
• Comparatively filing jointly is up to $150,000 for married couples up to $198,000.
• Each person under 18 in your household you will also receive $500.

So if we do some simple math on a single person with no children making $36,000 per year:

All persons on unemployment are also getting additional federal stimulus of $600 per week which has been extended to January, 2021.

If you make $36,000 per year ($3000 per month), and your weekly unemployment paycheck is $400, and you get a stimulus check of $1200, and you get an additional $600 per week, you could actually be making out pretty well in the month of April. We’ll assume this person, for example, is paid bi-weekly and their first check was withheld as is true with most W-2 employees.

Weekly: $400 + $600 = $1000

Monthly: $4000 + $1200 = $5200.

(minus taxes). Not bad.

Secondly, our government has done a fairly fine job of ensuring there is money available for small businesses to use during this crisis. They’ve opened up a Loan Forgiveness Program called the CARES ACT. Under this provision, small businesses are allowed to make a claim of average payroll costs X 2.5 which must be used for payroll expenses, rent, and utilities.

There is a very long document going over the legislation and stipulations of the loan, of which I’ll spare you the dry read, but this is a pretty good deal for small business owners. It’s basically a loan given that is completely forgiven if you use it for what it’s intended for.

My opinions about our current administration have always been waning, but in all fairness, a lot less could be done for it’s citizens during a time of crisis. They acted relatively quickly and even though some people won’t get stimulus checks right away, they are making it a priority to send money out to those who need it most first.

For example: If you make $10,000 or less per year, you’ll be first in line to receive your check or bank deposit.

The Bad Stuff

There are many, many people in the United States right now who are living paycheck to literal paycheck, and the stimulus checks promised aren’t exactly flying off the shelf. As with any government mandated policy, things are slow moving, and bound to run into hiccups. Some people have been out of work for weeks, the unemployment system has been backed up and back logged with some people 3 weeks later still not approved, and stimulus checks still haven’t arrived, and probably won’t get deposited for at least another 2-3 weeks.

The CARES ACT Business loan program was finally approved, and they’ve come out with new applications every hour with new stipulations with changing guidelines since the deal was announced. We did however, expect this to be a something of a mess so business owners are just trying to bide the time when the thousands upon thousands…. upon thousands of applications come pouring in for these loans.

Basically things are slow and systems are breaking down, and people are running out of money and getting extremely worried about their future. Not a good place to be when you’re forced to stay home, can’t go to work, and cannot pay your bills or feed your family.

Banks, Banks, Bank

So what happens when you close down the local economy in a country like the United States?

First thing to go is your restaurants and it’s workers. There are about 13.49 million people who work in restaurants in the United States according to statista.com

These workers generally are working paycheck to paycheck with no substantial savings to mention. They also usually work mainly on tips, many times those tips are cash. They are required to report all those tips to the IRS each year, but many do not include the cash amounts they get each day. This will change the amount they are due when they apply for unemployment if they are to be laid off or fired.

The owners of the restaurants usually have an extremely high overhead rate, and rely heavily on daily and weekly sales to keep the business going. Most restaurants are in high traffic locations, where rent and leases are extremely costly.

How long could you afford a $50,000 a month lease agreement without any money coming in?

Then you have retail businesses which aren’t essential that basically lose all incoming funds. These businesses are usually smaller companies or individual owners who will have to dip into personal savings to keep their businesses afloat. This can only last so long, and they will have to lay off all of their employees if they are to even have a chance at surviving 2-3 months with a zero sales coming into the business.

All these workers now no longer have jobs and need some form of payment to pay their bills, namely, their rent. All of these businesses can cut expenses as much as they can, but rent is still due. all restaurants could close their doors and survive, but that huge overhead of rental expense is always looming.

Do you see a pattern here?

It’s called Rent.

Everyone has it. We all owe it. And it’s the one thing that will put us all out of business, out of homes, or out on the streets when this is all over. You may here terms like “rental freeze” or “rent deferment” floating around. And this gives a reprieve for many people and businesses right now, but what about when our sort-of-non-effective-partial-non-mandatory-arguably-useless-lock down is over? What happens after the rental freeze goes away? You might ask yourself, do I owe 3 months worth of rent when this is all over?

The short answer is Yes.

You see, when this is “all over“, it’s really not “all over“. Our economy doesn’t immediately bounce back to pre-February 2020 rates. We don’t come out of isolation to an immediate booming economy. 20% or more of our local businesses are no longer here. Restaurants have closed their doors for good. Many small businesses are no longer around, and the ones that are, aren’t hiring full staff until numbers bounce back.

But you still owe 3 months of rent. And so does your landlord. And so do the businesses that survived during the crisis, if they received any relief at all. Your lease is under a finite time contract, meaning, it ends on a particular day in a particular month. The banks don’t just stop asking for the money that’s owed, and your landlord can only cover having no rental income coming in for so long until he or she must give their property back to the banks.

I recently read an article about a New York property owner who was in this very exact situation. He has 9 properties he owns, with 9 mortgages. If all 9 of his renters couldn’t pay rent for 3 months, that’s 27 mortgage amounts he’s going to owe the bank when “all get’s back to normal”. And that’s 3 for each renter under him. Who can afford all this?

The Banks can. And they will. And rest assured, you’ll be in debt trying to not get evicted, and that property owner will be put in debt trying not to get his properties taken from him by the banks.

And who makes out on all these properties that get repossessed, and all this debt incurred from all the loans being given to all these renters, and landlords, and business owners? You guessed it. The Banks.

So What Do We Do?

We pay our rent.

Renters need to use the stimulus money we are given to pay rent, so this trickle down effect doesn’t happen.

Small businesses can dip into personal savings, use the CARES ACT, and take disaster relief loans out and hopefully weather the storm.

Landlords will hopefully have responsible renters who will pay rent with their stimulus checks so they aren’t forced to foreclose on their properties.

Property owners should use the stimulus money to pay mortgages so their homes don’t get repossessed.

We should NOT buy new shoes, a new guitar, or a new computer with any money coming in right now. Rent comes first.

What Could Happen (But probably won’t)

So the government gives us a stimulus check to cover these things, but it won’t be enough for many Americans. The loans currently offered businesses won’t be enough. Each month we halt our economy will be yet another month of our government sending us the bare minimum in hopes to keep this idea from happening. Will we get another $1200 next month? If the economy is halted, you best believe we’d better, or this will get ugly and irreparable extremely fast.

Will they give out a few more trillion dollars to boost the economy and keep the housing and real estate market afloat?

Will businesses get money to pay their rent until they are released to take in business again?

So what could we do?

Halt time.

Everyone’s mortgages or leases or rental agreements get halted, and all existing leases or mortgages get pushed out for the time during the mandatory lock down. If we are on a two month mandated lock down, then say your lease ends in October of 2020, well now it ends in December 2020. This is at first glance seems like the most moral and fair way to handle a crisis like this.

All car payments would be pushed out to the back end of the loan.

All equipment leases would be pushed out to the back end of the lease.

If the federal government were to mandate this type of idea, it would create an immediate 180 degree turn from our current state of being of distrust and literal disgust of the government and administration, to one of hope and faith that when the people of the United States really needed help, they received it without stipulation.

This is how you create a society built on trust.

A few ideas to boot:

1. If you’re employed during this time without any economic hardship, you would not be eligible for this program.
2. How would we deal with the disparity between one rental owner who is required to move out because they did not get rental relief, and one who is not because they did?
3. How could banks and property owners keep track of all this and balance this out in a reasonable manner?

Send me your thoughts below on how this idea could work, or comparatively be disastrous!