Tuesday, August 04, 2009

Debt Deflation Case Study: The Bail Bond Industry

Here's another "on the ground" economy exclusive for you - earlier this week, I was having a friendly chat about the economy with our neighbor who sells bail bonds.

Talk about insight into what's going on in the world of Joe Sixpack - with an ironic twist that these are the families of folks who robbed Joe!

On the surface, most folks believe the bail bond industry to be absolutely recession-proof, perhaps even counter-cyclical...but that's not the case.

Credit is tight, tight, tight my neighbor says, and it's completely affecting the way he does business. Even a year or so ago, people would be able to pony up $5K for a bond, he says. Of course they'd advance it against their credit card, or take equity out of their home, etc - but they would come up with the money.

These days, that's out of the question. If he quotes anywhere near that amount, they are on the phone calling a competitor. So in the current environment, he needs to lower the initial "down payment" considerably - basically to cover his own costs - and hope that they pay the remainder in installments out of good faith.

As these are not exactly "creditworthy" borrowers, there is considerable risk to this approach, which means a lot of bad debts must be written off (and then it drifts away to "money heaven").

The bottom line, dear reader, is that this is debt deflation. While Ben Bernanke is indeed running the printing presses at full speed, credit has not (yet?) trickled down from the pockets of Goldman Sachs and Co down to the average slob.

Thus, you're seeing an "inflationary boomlet" in asset prices - stocks, oil, etc - that is not (at least yet) being reflected in basic goods and services.

Now Marc Faber recently commented that he's surprised prices have not dropped MORE during this time of economic turmoil - an interesting point which we'll keep an eye on...

So stay tuned to this space for more inflaton/deflation updates, straight from the trenches!


Brian said...

Hi,Great Post. I was organizing my financial blogs bookmarks and I found yours. Started read yours and it started to make sense to me. Elliott Wave predicted the S&P 500 bear market rally to 1000 in April. Download a few of the free ebooks from Elliott Wave and now I am turning my blind sided bullish view on inflation and commodities to bearish. I have signed up for the Elliott newsletter and I am going to read and listening to everything I can. What is your view on Gold and Silver now?

Brett Owens said...

Thanks Brian, appreciate it! You know not long ago I was also wildly bullish on Gold and Silver, and I credit Elliott Wave for giving me pause on that view, which I now fear is too wildly held.

So like EWI, I'm not somewhat bearish short term on gold and silver. I've sold all of my gold stock positions and am sitting in cash (US dollars that is!).

I have a silver call option for this Dec that I've owned for awhile - it's now profitable, but I don't feel good about it now to be honest.

Cathy Mena said...
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