How will the financial crisis affect YOU?

There's a lot of talk in the media about what's in store for banks, governments and financial institutions, but surprisingly little about what will happen to the average consumer. I don't mean in a vague way, such as 'loans may be harder to get', but in how you'll notice that there's something odd going on when you walk into the supermarket or try to get a part-time holiday job.

Let me try to help with that. Before I focus on consumers, though, I'll need to share some background on what's going on with firms.

One of the biggest things that's going on right now, as far as consumers are concerned, is the frozen market for commercial paper. Just like people, companies are occasionally short of cash for the day. If you go grocery shopping and find out at the till that you don't have enough cash to pay for what you put in your basket, then chances are you'll pull out a credit card. It's not that you're bankrupt; you just don't have the cash at that particular moment, and a credit card is a convenient way to borrow small amounts of money for short amounts of time. As long as you've been paying your credit card bills on time, there's very little reason for the card to be declined.

A company's equivalent of a credit card is 'commercial paper'. Let's say that Starbucks finds out on Wednesday that it doesn't have enough money to pay its workers on Friday. There are many non-scary reasons why this might happen. Starbucks may have a lot of its cash tied up in loans to other companies, or in long-term investments. Maybe some unexpected bills have come in. It could be that Starbucks itself is paid on Friday. In this case, it'll issue commercial paper: a very short term, very safe IOU. In the ordinary scheme of things, it isn't difficult to find a buyer for this IOU. If Starbucks says, 'Lend me a million dollars on Thursday morning, and I'll pay you back on Friday evening, with a thousand dollars' interest,' that's pretty much a free thousand dollars.

Or so you'd think.

Not too long ago, a whole bunch of lenders were burned when the company they lent a large amount of money to overnight went bankrupt - also overnight. (I think the company in question was Lehman Brothers, but I may be mistaken.)

This sent the financial world into a panic. There's a lot of money out there that WANTS to be lent (because loans earn interest). The problem is that no one knows who is safe to lend to, anymore.

The situation's very much like that of a person who fell in love, trusted the object of affection, and then was betrayed, only finding out when they woke up one morning to find their wallet emptied and the car keys missing. Lenders are in the 'I'll never love anyone ever again' stage of things.

The markets for commercial paper are pretty much frozen. Very few people are willing to make these short-term loans right now. Not even to really big, well-known companies such as McDonald's. Not even at a higher-than-usual interest rate.

What does this mean for consumers?

For the near future, companies in general are going to have to be a lot more cautious. They can't afford to run out of money, not even for a few hours, because no one is willing to lend it to them.

The first thing that comes to mind is that we're likely to see drastic reductions in what stores keep in stock.

That jalapeno jelly at the supermarket that you love, but no one else ever seems to buy? Gone. Your favourite obscure retro-steampunk-jazz-opera group that HMV always kept a few CDs of? Gone. The lonely copy of 'Care and feeding of elderly komodo dragons, a multivariate regression analysis with thirteen statistical appendices' at the local bookstores? Fuggedaboutit.

Stores will do everything they can to avoid being stuck with unsold goods. Bookstores will stock bestsellers and proven classics in overwhelming preference to anything else. Music stores, already hurting from the online onslaught, will focus on top 40 hits. Supermarkets will try to carry only fast-moving products.

The good news? You'll probably see a lot of clearance sales in the next few weeks as stores try to dump their poor sellers in order to open up inventory space for safer products. Enjoy them while they last.

If you're reading this, you have online access, and are probably able to shop online at places like Amazon. In that case, the loss of variety in stores won't affect you as much as everyone else. If you want your obscure Brazilian soap opera translated into French, you can probably find some place online that sells it, and don't need to rely on bricks-and-mortar establishments.

Less good is the impact this has on new, quirky stores.

I enjoy window-shopping and walking through the commercial parts of town. A lot of the fun comes from stepping into really weird stores that sell things you never suspected existed. (Hush, you. I mean the family-friendly sort of weird.) As fun as such stores are, they have very short life expectancies. With the current freeze on loans, chances are a lot of them will never be 'born' in the first place.

If it's difficult for established businesses to get loans, it's almost impossible for new and unproven businesses to do so.

A lot of stores that WOULD have opened if loans were more easily obtained, will now not open at all. The salaried accountant dreaming of starting his own flower shop will now have to continue dreaming, since a lot of the financing required to start up a business is (temporarily) unavailable.

When you're talking about one flower shop that doesn't get built, it's not so bad.

When you multiply that by all the new businesses that WOULD have started up all over the country, continent and world...

Well, we're going to see less jobs available these holidays. It's probably going to be noticeable if you're out there on the job market. I don't expect the jobs in the economy to actually fall - I don't think a lot of companies will actually fire their workers, at least in Canada... However, there will be much less of an increase in the number of jobs than there would have been without the crisis. People that would have hired, won't hire.

Related to this, you can also expect franchises to stop expanding as quickly as they have in the last few years. If you were hoping for an extra twenty Tim Horton's stores in Yellowknife, you're probably out of luck. Then again, the Tim Horton's nearest me seems to constantly have a lineup, even when other food outlets are doing poorly, so that may be one of the few exceptions...

Due to the inability for companies to get loans, I also expect a fall in the amount of courtesy services, freebies and promotions that are offered. Coupled with this will be a general rise in prices. Both of these will help to cushion companies against possible drops in their now-vital pool of reserve funds.

What does this mean? Coffee shops that used to give a free chocolate square with their drinks might stop doing so. Airlines will continue to cut back on things provided free of charge during flights. The Body Shop has already started charging a small fee for 'gifts' they used to give for free to shoppers who bought many products at once. Two-for-one promotions will become less generous. You may have noticed HMV moving from 2-for-40 to 2-for-60 for similar products in a short amount of time.

I suspect that stores will do what they can to keep posted prices from rising too quickly. They know this can drive away customers, especially if they're one of the first establishments to raise prices. It really looks bad if you're selling a DVD for 30 dollars when the store across the mall has it for 20, even if the store across the mall is THINKING of raising their price to 30 next week. Instead, prices will be raised less directly when possible. Reward or 'points' programs will be made less generous in difficult-to-understand ways. A planned 50% off sale may become a 40% off sale. The cosmetics department may offer half as many free makeup workshops this year than last year. That sort of thing.

That's not to say prices won't go up. They WILL. Not being able to get short-term loans means businesses need to keep around a pile of cash for rainy days. That pile of cash is an extra cost. At least part of the extra cost will be passed on to the business's customers. It's just that price tags won't go up by as much, or as quickly, as you might expect.

I have the nagging feeling that I've forgotten a lot of important consumer-related repercussions that I wanted to mention... Feel free to remind me of them in the comments!

Update: Frosted animal cookies have fallen prey to the commercial lending freeze.