Tuesday, July 8, 2014

The Strange Idea That Debt Is Way To Boost Economic Activity

Is American Debt Necessary? "We Have to Get Americans Borrowing Money Again with the Banks Lending " so Say Our Top Public Figures Lex Loeb Contributor Network . I sit and listen to way too much financial news. Secretary of the Treasury, Hank Paulson was just on television saying that we need to get the banks lending again. and I am thinking why? Are American financial institutions and consumers so much in debt that they need to borrow more money yet to pay off their old debts? Don't any companies in the USA have actual profits that can cover their actual expenses without borrowing money? Does every business and corporation have to borrow tons of new capital each month or year to build their businesses and achieve a new threshold of growth? The hurry for the country to go lend more and more money when banks seem to be having trouble paying back what they already owe seems a little strange. Interest rates are still up and everyone wants to lend more money now that the rate is higher? More money to lend does not necessarily lead to more homes sold nor reductions in supply nor in lower prices to attract cash strapped buyers. If people borrowed less to begin with fewer of them would be loosing their homes in foreclosure. Over a number of years I have learned to identify better than average businesses worth making investments in by realizing that better businesses do not go excessively in debt except in dire emergency circumstances and the best of the best do not have new needs for new major capital expenditures. If you want to know how billionaires like Carlos Sims and Warren Buffet got that way the two factors of finding businesses that do not need to recapitalize and otherwise do not borrow excessively. Compare these two businesses: McDonald's and Dairy Queen. if you go to a McDonald's, you immediately see that the average franchise unit has been recapitalized. Fixtures though out the stores are new and up graded. The appearance of a McDonald's restaurant is many times better than the average Dairy Queen . Some dairy queens are virtual time warps with out dated 20-40 year old store fixtures. Although McDonald's restaurants can be highly profitable they are not necessarily more profitable than the average dairy queen. The American Economy can in essence remain a Dairy Queen with prudent lending and borrowing or it can go all out become America with all the latest stuff and relatively high debt to show for it. There is no reason to believe thus to believe that high growth is necessarily connected to increasing debt. If a restaurant franchisee has to take out debt just to modernize his existing restaurant it does not necessarily mean that the news borrowed capital expenditures will increase bottom line profits. What debt does is essentially give someone else, who otherwise, has no direct interest ownership of the bossiness a part of their operating profits. High debt can also influence market prices. Real estate agents lust for low interest rates because they know it means that people will go crazy borrowing money to buy real estate when the interest rate is low. That raises the value of any real estate inventory they may own. The effects of easy money to lend is greater demand , higher prices with the cost of servicing the debt to lenders. Debt gives buyers immediate possession of property which may be a benefit but the capitalization is costly. The alternative is less debt and a lot less debt and there is no evidence that necessarily means slower economic growth because new capital spending does not benefit all businesses equally. For some business massive new capital expenses are the only choice they have. Some companies burn capital and waste it while others can really get some traction with it There are different ways to capitalize companies without using a lot of debt. The hurry to start a new debt cycle may not be something that is absolutely necessary. Debt is an added cost that has to have benefits that exceed the cost of making the payment on loans. The sad fact is that among world corporations, Not very many of them have good long term records of borrowing where the sustainable profit growth justifies taking on debt. The secret of easy credit was that most American borrowers were thinking that inflation would reduce the cost of borrowing . The other illusion is that borrowing money can save on long term taxes but it still may not beat direct low re-capitalization growth . . Close

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