What a Severe Contraction Looks Like

TW: The press release by Best Buy frames the dilemma posed by a severe demand contraction. Best Buy's business has hit a brick wall, so to survive they slash cap ex by at least 50%, probably close some existing stores etc. The Republicans keep bringing out their 1980's playbook which calls for tax cuts (keep in mind they already tried their monetary stimulus plays in the form of interest rate cuts but those have not worked). But explain to me how a reduction in Best Buy's corporate income tax rate or how accelerating their depreciation allowances would change their plans?

Perhaps cutting the payroll tax makes it more likely that a consumer can afford a flat screen or perhaps that consumer is freaked out and saves that reduced tax cash or perhaps a road or school is a better use of those precious stimulus dollars than a flat screen TV.

We need demand but not speculative demand based on say lower capital gains rates but real demand focused on investment. When the market breaks down there is one investor left and unfortunately it is the one that can still print money unlike Best Buy or me or you.

From Calculated Risk quoting a Best Buy press release:

“The historic slowdown in the economy and its effect on our business over the past 90 days have been the most challenging consumer environment our company has ever faced,” said Brad Anderson, vice chairman and CEO of Best Buy. “We believe that there has been a dramatic and potentially long-lasting change in consumer behavior as people adjust to the new realities of the marketplace...." [Based on the recent changes we’ve seen in consumer behavior and the potential for worsening consumer spending, we need to prepare our organization to operate in a wide range of potential macro economic scenarios in the coming year. Additional prudent actions will be taken to prepare the business, such as reducing our capital spending by approximately 50 percent next year, including a substantial reduction in new store openings in the United States, Canada and China."

Company after company is announcing reduced capital spending plans, and this means non-residential investment will decline sharply next year."