(I think this is the wrong group for these questions... What might the right group be?)
Why is it, that because people are having a hard time borrowing money, our entire economy is falling apart?
Why must our farmers borrow money every spring in order to have any hope of harvesting in the fall? Why can't American small business do something as simple as make payroll without borrowing money?
I have been told that if people don't spend more than they have, our entire economic system would fall apart, and here it is happening, but why is that?
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Because if you are running a business that provides a 15% return on investment, you are better off by borrowing at 6% than you are by sitting on cash. By holding on to cash you are effectively losing the 15% per year that you would make if you invested the cash in your business.
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Because businesses use borrowing to even out cash flow. At the moment, they are having a hard time borrowing to meet payroll and pay suppliers. Since they are slow to pay suppliers, this trickles down from business to business where even though you may be in good shape, the people that you sell to are either late or unable to pay you what they owe. This leads to suppliers not sending parts and materials, so manufactures inventories are backing up and plants are shortly going to close down.
In the case of the farmer, he/she has to pay property taxes in the spring, pay for seed, pay to get the equipment ready to go, pay for fuel to till and plant, then pay for top dressing and chemicals, then pay for the crops to be harvested, and then truck it to the elevator or market. This all happens before they are paid one single dime. So, unless the farmer is wealthy, they have to borrow this money, then pay it back if they have a good crop.
Many farmers are in a position where they had one or two bad crops due to the drought and recent floods that they borrowed the money and did the work, but now have no crop to harvest. These folks are behind the 8-ball, and if they cannot get a loan on good terms in the spring, they are done & will lose the farm.
You have to invest to make a rate of return. Very few people have enough money to both live and take care of a family from day to day, and fund a business that produces a product. Even someone like a plumber, someone who collects for a job at the end of the project, has to have working capital to pay for the time spent on the job, buy tools, and pay for materials during the time it takes to complete a plumbing job. Yes, small projects like a 2 hour leak fix can be self funding, but something like doing the plumbing in a new house requires a lot of up front money, and it make take months to get paid.
But then when your business stops providing a return that is higher than your loan rate, you are screwed. Right?
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That means that rather than using past successes to get them through current problems, they are using assumed future successes to get through current problems.
It seems to me that there is an inherent bias there; when the company is making a lot of money, they assume they will still be able to do so in the future, while when they are loosing a lot of money, they still assume that they will make a lot of money in the future. That doesn't sound reasonable to me...
So, because the company started out in debt, it is beholden to remain that way forever?
It seems to me that the entire system, or maybe it is just the mindset of the participants, requires every year to be more successful than the last, or the whole "house of cards comes tumbling down" (as someone put it in a different thread.)
It seems to me that I am always told the importance of keeping money in reserve so that I don't have to borrow just to meet basic household expenses. Isn't that the same case with companies? Yet, it seems our economy built under the assumption that it isn't.
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One of the huge problems is inter bank loans. Banks rely on inter bank loans to move money. When banks are reluctant to loan money to other banks, it creates a huge block of money flows.
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The duty of a company is to act in the stockholders best interest. It is not currently in the interest of a stock holder to earn a profit, and then sit on the money. The stock holder didn't capitalize a factor to be a bank, they want the factory to be a factory. As a result, if the factory is not using the money, they need to return it to the stock holders as dividends (or buy back stock to bump up the stock price).
That is how life works on a 90 day cycle. Some say that is how the Soviets were able to accomplish much with little was by planning in
5 year cycles, and the Japanese often have 20 and 50 year time frames.
That is again how it works. If the company starts to pay off things that it can lease, it isn't matching costs to revenue. If a company gets too fat and happy, they become the target of a raider who is able to come in, break up the company, sell off assets, and then leave the carcass as a heavy debt-laiden public company. That is what happened when Ponderosa Steakhouse Co paid off their corporate jet, and what happened to Northwest Airlines when they paid off their fleet of jets.
Don't think of a large public company as a on-going business. Rather, think of it as going to Las Vegas every 90 days. You put down your bet, spin the wheel for 12 weeks, and then see what you come up with. You either create value and your stock goes up, or you fall short and the stock goes down.
John A Weeks III has a lot of good reasons. We punish saving and reward borrowing. Borrowing and inflation are built into our financial system. Gold backed dollars make this difficult, but with fiat money it is a snap of the fingers. Modern financial history started August 15, 1971 when President Richard Nixon took us off the gold standard. We are living in year 37 of modern financial history. Comparing now to before then is comparing apples and oranges. Since you seem to be looking for ?big picture? answers I?ll refer you to:
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on the video to start.
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I like your economic horse-sense. (And I can tell you haven't been brainwashed with new math / new economy MBA hypotheses :-) Part of wisdom is, I believe, an ability to analyze to the really important stuff, and see through the fads of thought and other tulip bulb manias.
In this age of global warming and resource concerns, some aspects of the American Indian way of life don't seem so uncivilized. In this age of greed, honesty and friendship seem to gain value - as does a solid money footing.
The deleveraging process applies mostly to the 20+ to 1 financial sector. The consumer probably will reduce spending below income again, and begin paying down some debt, but that is easy compared to the gross excesses of the financial sector, and the consumer is not the one to blame for this financial crisis, IMO. All businesses may find other sources of funds than short-term borrowings from banks.
I don't see the economy falling apart. I wonder if anybody else does? (I do see a lot of 'banks' that have been unbelievably mismanaged, and that sector has already fallen apart. The eggheads turned out to be Humpty-Dumpties, after all.)
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I guess I have to disagree about the value of gold. Gold has no real value, and tying currency to a shinny metal just makes a mess of the system. Gold is hard to move, expensive to store, costly to buy, and even more costly to sell. You cannot eat it, feed it to cows, to make any useful productive product out of it. It never changes in real value, and it doesn't throw off dividends or interest.
Calling something "fiat money" is a code word for those who want to go back to the happy times of the 1890's when we had financial panics ever 18 months or so that wiped out everyone's stock values. It was a system where the ultra rich got richer, and everyone else was more or less a serf to the few factory and railroad owners.
There is nothing wrong with paper money. For example, lets say a farmer has an apple and a leaky pipe. I am a plumber, and I haven't eaten lunch yet. I meet the farmer. We agree that I fix the pipe in exchange for the apple. We both are happy, and it is a win-win deal.
The very same thing could have happened as follows. I value my pipe fixing at one piece of green paper, and the farmer values the apple at one piece of green paper. The farmer gives me a piece of green paper for fixing the pipe, and I give a piece of green paper back for the apple. As long as we all agree that the green paper represents value, we have a system of money. There is nothing evil, illegal, or even immoral about that.
In fact, one can argue that the gold standard is evil and unfair. It makes nations with gold deposits wealthy, and they dominate the nations that have little or no gold deposits. Same thing with silver. China was wealthy when silver was used to back currency, and they went bankrupt with many nations abandoned silver-backed currency in the early 1900s.
The problem we have today has nothing to do with gold backed currency. The problem is that a number of firms are holding mortgage paper that is worth far less than they thought, and now they cannot pay their bills. Since those are the same firms that make a lot of loans, they are not able to make loans right now. That has rippled back to clog up the whole economy. The way out the mess is to get lending moving again, and so far, the only people with enough money to do that is the federal government. Once the rescue money starts hitting, and money starts flowing, this crunch will work itself out just like a pig through a python.
On Oct 12, 8:28 pm, "John A. Weeks III" wrote: [snip]>
You throw some interesting new perspectives on gold, and offer a very good explanation of paper currency. However, the paragraph above does not mention the extent of leverage financial institutions employed in their purchases or issuance of mortgages? I have heard or read numbers ranging from 6-7x (for GE) to 30x (for Lehman).
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I agree with you that John has good insight. My problem was that I had a mouthful of coffee when I got to the "pig through a python" comparison.
-HW "Skip" Weldon Columbia, SC
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You mean how both of these countries managed to tank their economies?
Do you use credit cards? It's the same concept.
Wow, between this and your gold comment, you've really got the hyperbole going...
-Will
william dot trice at ngc dot com
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