Since 1930, Hostess Brands, Inc. has produced some of America’s most iconic snack foods, like the ever-popular Twinkies, Ding Dongs and my former weakness, white powdered sugar Donettes.
This week, Hostess announced it is shutting down operations and closing its doors after 82 years satisfying America’s sweet tooth. Some 18,500 people will lose their jobs. Why? Because one of the labor unions representing workers at Hostess facilities refused to accept an austerity plan that would have saved the cash-strapped company.
To be fair, the company was asking a lot from the members of the Bakery, Confectionery, Tobacco Workers and Grain Millers’ International Union (BCTGM)—an 8% cut in wages and 17% decrease in benefits. However, by rejecting the new agreement, BCTGM members not only sealed the loss of 100% of their own wages and benefits, but that of the other two-thirds of Hostess’ employees who were willing to accept the proposed terms.
While it’s easy to judge those who made such a poor decision—refusing to accept short-term pain to preserve their jobs, we should think before casting the first stone. Who among us likes to give back something we feel we deserve?
But this is the sad dilemma now facing all of us. Government benefits of all varieties are facing real cuts in the coming decades. Government has promised us things it has no real hope of providing—even if they confiscate everything from our affluent neighbors. America has little experience with this. We are entering an era of loss, and we’re profoundly unprepared to accept it financially or emotionally.
Like Hostess, the federal government has far too much debt. But incredibly, we can’t even agree on the extent of the threat it poses, much less what to do about it. Paul Krugman, Princeton University economics professor, Nobel laureate, and Op-Ed contributor to The New York Times says, “Debt matters, but not that much.” Oh, yeah? Ask Greece, Germany, Argentina, Iceland, Zimbabwe, Stockton, California, Bridgeport, Connecticut or Prichard, Alabama. Ask anyone who has ever fallen behind on a debt!
In the case of the U.S., debt doesn’t matter so long as our creditors are forced to accept payment in devalued dollars. But before long, they’ll tire of the “inflate our way out of this mess” schemes of Federal Reserve Chairman Ben Bernanke. His quantitative easing strategies amount to little more than printing money. When creditors refuse to lend us more, our debt will matter a great deal and it will matter to every single taxpayer.
When the U.S. government, run far less efficiently than Hostess, announces to the people that substantial budget cuts are coming, I predict we’ll seek to pass off the financial pain to someone else. Democrats will want to find money by cutting Defense spending. Republicans will seek to cut the bureaucracy and reform entitlement programs.
Small states will want to cut federal subsidies to big states. Poor states will want money cut from rich states, which in turn will want cuts from programs that don’t affect their budgets. Private companies will point to nonproductive, wasteful bureaucracy. The shifting of blame and responsibility will be endless. Nobody wants to go backwards, even when there is no choice.
If you care to see what the desperate scramble to prevent austerity from hitting home looks like, check out “Greek protests” on Youtube.com. There are even live cams set up now when riots flare up. You can see the anger and frustration unfold like a reality TV program. We’ve already seen massive protests in Wisconsin over Scott Walker’s austerity plan. I fear those were just the warm-up act. What’s coming will make that unruly exhibition look like a Sunday picnic.
Extend and Pretend Will Not Work Forever
You may still be asking if austerity is avoidable. Could the “extend and pretend” policies of our Federal Reserve actually work? Yes, but not forever. Let me give you a real life example from another American iconic brand, Milton Bradley’s famous board game, Monopoly. My family still likes to engage in this slow moving retro form of entertainment that requires dice, cards, an old shoe or ship for a game piece, conversation and best of all—thinking.
In a recent match, our 14-year-old son, John, was asset rich and cash poor. He began mortgaging all of his properties to stay in the game. His strategy worked at first—until he ran out of money again. The rules state that you can only borrow from the bank and it must be backed by an asset or property. This limits the amount a player can borrow and can end the game abruptly for poor risk managers who jumped at the chance to purchase coveted real estate like Boardwalk and Park Place without counting their cash reserves. These are definitely old-school rules! Since the rest of us did not want to see John suffer the humiliation and pain of being the first to lose the game through default, we compromised.
The bankrupt player was allowed to hand out I.O.U.s when he landed on properties that bristled with houses and hotels. He simply wrote down the amount that he owed in rent to each of the other players and continued playing in hopes he would recover over time. This should have enabled him to stay in the game for the duration, right? Wrong.
While you could argue theoretically that this type of debt “doesn’t matter,” we quickly discovered that in practice, it matters a great deal. After a few rounds of allowing John to go further and further into debt, the other players began to realize they needed the money John owed them. They were taking on debt too. Guess what happened next? We stopped loaning money to John. We demanded cash. Suddenly, he was in BIG trouble. His properties were not worth as much as his debt and we had grown tired of his neglecting to pay us. It was game over for John and a valuable lesson learned for all of us.
While the family ended our game in good spirits, in real life, this scenario will make lenders very angry with the borrower. Right now, our federal government is handing out I.O.U.s like there’s no tomorrow, but most assuredly, “tomorrow” will come.
It would be much better if our government began an austerity plan and stopped borrowing our nation into bankruptcy while we can still limit the pain. But don’t count on that happening. The day will come, however, when the government will be forced into austerity that will bring pain to millions.
My advice? Prepare now, financially and emotionally, to protect yourself and your family. Rather than watching and waiting to see what the government will do, reduce your uncertainty and anxiety by taking corrective action. Reduce you debt. Save all you can, and diversify your holdings. It’s the best way to prepare for whatever lies ahead. Maybe being forced to give up Twinkies is a good first step towards developing your personal austerity plan.