Thursday, July 28, 2011

BloggeRhythms 7/28/2011

Having spent most of my career in the commercial financing business, the things I see going on in the debt situation drive me bats. Because we have all these politicos chasing themselves in circles, while almost none seriously face the issues. And whether their reasons for failing to solve the problems are due to ignorance, self-serviance or pure politics itself doesn't really matter, because the public's paying dearly for their miserable performance which will likely get even worse.

From my perspective, I don't think you have to know very much about how financing really works to grasp almost any debt situation, because no matter how sophisticated loans and borrowings seem to be, they're all actually pretty simple. Because, as far as lenders go the only thing they really need to know about borrowers is: How are they going to get paid back?

Consequently, before any knowledgeable lender ever lends a dime, they'll require enough information that proves the borrower can repay the loan. And ordinarily, the repayment funds should be readily and regularly attainable from the borrower's funds when they're due in the future.

Since that's generally the case, new businesses, young enterprises and most operations not earning profits have a very difficult time borrowing money, because they can't always prove that they can readily handle loan obligations. And as far as most lenders go, all they want is to collect what they're owed in a timely and orderly fashion, without having to go through the pains, trials and tribulations of problem collections.

Beyond that, knowledgeable lenders understand that loan payment funds should derive from a businesses' day to day operation, not from equity, investment or other types of assets. Because sooner or later just about any entity living on the liquidation or sale of assets will eventually exhaust them all and likely have no way to replace them. Consequently, the key to healthy businesses regarding solid lending arrangements is the businesses' ability to consistently run profitably.

And that's where the government's present situation seems directly comparable to commercial business loans. Because the current administration cannot demonstrate an ability to pay back its exiting obligations from income received, and cannot demonstrate valid expectation of improvement any time soon, if at all, because its strangled businesses to the extent that they can't, or won't, contribute. Therefore, with nowhere else to turn, government now seeks to take more from those who produce wealth and borrow the rest.

But, let's say government actually achieves a higher debt limit and squeezes more funds from the "rich." At best, that's only a temporary solution. Because as they continue to borrow, while the economy stagnates even further, lessening government's income even more, what will they do next time around?

So, since government currently looks and performs like a failing business and has no plan to correct the problem at all, what lender in their right mind would lend it another quarter? The answer is: none.

Consequently, the nation doesn't need another nickel in debt at all to fix the current fiscal problem. Instead what's required is a management that knows what its doing, a viable business plan, and a reduction of existing debt until the country pays out less in borrowing costs than the amount it takes in.

That's it for today folks.

Adios

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