Posted on 11/09/2008 5:43:14 AM PST by TigerLikesRooster
The Problem With Deleveraging
By John Mauldin - November 8th, 2008, 8:03AM
November 7, 2008
By John Mauldin
In general, we consider it a good thing to save money and to “owe no man anything save love.” But what happens when a debt-happy society wakes up and decides that saving is a good thing for everybody? What happens when banks and hedge funds decide (or are forced) to reduce their debt? What happens when businesses of all sizes find it harder to get loans to operate?
In this week’s letter we discuss “The Great Unwind,” that process of deleveraging that we are now in the midst of. We also explore some recent economic data on the economy. It’s a lot of ground to cover, so let’s jump right in.
1.2 Million Jobs and Counting
The unemployment numbers came out today and they were ugly. October showed a loss of 240,000 jobs. But the really bad part was the negative revision to August and September, by a further loss of 179,000. As I have written in the letter numerous times, downward revisions in a slowing economy are the rule. Unemployment estimates are largely based on recent past performance. There is no way the models can catch a change in the overall trend. All the statisticians can do is go back and modify the data as hard information becomes available.
What the data shows is that the economy has lost 1.2 million jobs since December, with over half of those losses in the last three months as the problems from the recession accelerate. While two-thirds of the losses are in manufacturing and goods production, the service economy is also starting to show signs of strain. One in five lost jobs are from the retail sector.
(Excerpt) Read more at ritholtz.com ...
When few have much money, people have to pay taxes with their used goods. Taxman in the future will drive around huge trucks to haul tax(goods.) All ACORN boys would probably work for IRS.
Ping!
btt.
Interesting point about how people who splurged on cars using home equity depressing car sales over the next few years, since we now have better used cars on the road, combined with the fact that cars are lasting longer than in the past.
what was the role of timothy geithner in the demise of aig?
There is still money for business operation to be found in the factoring markets. My industry (staffing) uses this model extensively because we are asset light, revenue high and our payrolls and bills MUST be met on time.
We collectively maxed our credit under Bush 1. Bush 2 then started using pawn shops and loan sharks. Clinton actually started to pay down the debt, which counts a lot since GDP growth over 8 years reduced the GDP fraction of the national debt a lot.
If we are deleveraging, then there will be less credit and more cash in transactions (that is a tautology, not an arguable point). That means that as the credit markets shake out there will be less factoring and not more.
Kyrie Eleison!
It is just another sign of the sickness of our credit gorged financial system. Any sound business used to have several months operating expenses in the bank until modern finance got to work on it.
How much do you think my husband would be worth? Just a joke - sheesh.
I'd be tempted to agree, except you did not mention that our fine modern Dem/Socialist Congress made it much more attractive to operate a business by debt financing than by equity financing...
OK, but remember that cash flow, not cash sometime, is the heart of the matter.
More than half the temporary industry uses factoring, one way or another. Our bills (taxes, payeoll, work comp) cannot be put off, but we deal with a lot of asset-rich conventionally financed businesses who like to hold their cash and make us their bank of first resort.
Velocity is still the key, but many businesses have no inventory in which to invest.
My receivables run 17 days on average, but there’s a lot of business I won’t go after.
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