Tuesday, August 6, 2019

Death By Loans

Among business owners there’s an adage about bankers: they won’t lend you the money when you need it; they’ll lend you money when the business is doing well and you don’t need a loan. When things aren’t going well for the business, not only won’t banks lend you money but investors won’t give you money either. At times in US history, the US government has served as the Investor for the economy. In this way, it has been an investor that allows for the ‘operations’ to continue until the sales rebound and the ‘business’ is self-sustaining. Most recently in the Great Recession of 2007-2009, the government invested in the automakers, big banks (TARP) and the economy—specifically poor households—as a whole with an increase in unemployment insurance, SNAP food assistance and Medicaid coverage for the unemployed. There were also ‘shovel-ready’ investments in infrastructure projects.

During the Great Recession, the US government went into more debt, borrowing from bond investors, to ease the pain of the Recession. The government revenue-spending deficit eased when the economy rebounded. But in the last 2 years and projected into the next 2 years, the government is spending—running a deficit—as if we’re in an economic crisis. What happens when the next recession hits? Will the government have any room to invest in the economy—that is, have the ability to sell more bonds in order to fund its desired investment? How much more debt room can the US take when it’s at a debt/GDP ratio of 0.8 and quickly approaching 1.0 or more?

Suppose your business was doing well. Instead of paying off its debts, you took on more. How worried would you be in the next downturn of the business cycle?

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