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Source link: http://archive.mises.org/8666/business-and-credit/

Business and Credit

October 1, 2008 by

I’ve been amazed at the sheer numbers of otherwise sensible people who seem to be under the impression that paper credit–not savings and capital–is the key to capitalist success. It’s as if the core message of the Austrians has not stuck at all, and many capitalists themselves have bought into the line of the Keynesians and others who believe that productivity itself will dry up in absence of low-price lending for all. If banks “hoard” their resources, we will all be back to the stone age, or so they claim.

There are times to defend credit, as when government is trying to crack down on payday lending or trying to regulate credit instrument exchanges in the securities industry, and times to put matters in perspective and point out that credit must be built on a foundation of deferred consumption and savings.

So I really appreciate this corrective piece on LewRockwell.com by Stephen Fairfax, even if he might have pointed out that the good credit of large business–and their ability to sit on invoices for way too long–is well earned and that they are not “forcing” anyone to do anything. The long invoices schedules of big business are a market convention that can be overthrown in competitive rivalry if they are inefficient.

In any case, he is certainly right about how small business must work.

None of the small business owners I know depend upon easy credit to make their payroll. When things get to the point where you need to borrow to pay your employees, the end is near. Most small businesses fail in the first few years, in large part because business is not easy, it is hard. Not everyone is good at it. But it is an essential part of free trade and the market economy that businesses fail, so that new, better ones can arise in their place.

Few small businesses depend upon easy credit. Banks are generally reluctant to lend to small businesses, with good reason. Most small businesses are funded by owner’s savings. Sometimes start-up money comes from loans by parents or friends. While I can understand that small businesses involved in building houses might profit from easy credit, the market is sending unmistakable signals that there are too many houses that are too expensive. Flooding the system with still more easy credit can’t be the cure, it is the problem.

There’s no denying that life is easier with easy credit, at least until the bill comes due. But there is an alternative: savings. Before my firm hires a new employee, we save enough to buy the equipment they will need, and to pay their salary for the weeks or months it will take to train them. Those savings come from our profits.

{ 11 comments }

fundamentalist October 1, 2008 at 10:51 am

Very good points! I heard today that Catepillar issued bonds last year at 5% and recently had to pay 6% to sell similar bonds. This isn’t a sign of catastrophe in the financial markets. Banks control less than 30% of all lending in the country today. If banks fail, borrowers have other places they can go.

I heard the Catepillar story on NPR, which is not a bastion of free market economics. But they are doing a much better job than the talking pimps for the bail out on TV.

It’s strange that TV news people have been more hysterical and pimped the bail out more than any politician, but when the average American opposes the bail out, the news pimps blame politicians for failing to explain their plan.

Richie October 1, 2008 at 11:43 am

The people crying about the bailout are the ones who stand to lose the most from the failure of the bill. People such as Steve Forbes (who says the economy will come to a screeching halt without the bailout) and others most likely will be the biggest financial losers.

YerMawm October 1, 2008 at 12:10 pm

After Y2K, and 9/11 we had difficulties making payroll, primarily because of overdue receivables. We did not take out loans. Instead many of us who had savings either A) loaned money to the company, B) delayed our paychecks, C) both. No dependence on the banksters required.

As a result we moved to a more performance based pay system. This made us more efficient, and sensitive to market signals. No worky, no checky. None of this cushy lazy salaried worker crap. We are each responsible for ensuring we have marketable skillsets. The more I study Austrian Econ, the more this makes sense.

Pat October 1, 2008 at 12:49 pm

This is a very enlightening article. It is also another argument against the idea that the bailout would benefit almost everyone. My fear about this bailout is that it would obscure other items that had led us to this crisis.

In fact, this article in Financial Times points to another thing that is amissed in the current debate in Congress (Although I would admit, it is not the most important cause, it does have its role in the crisis):
http://www.ft.com/cms/s/0/f6f7dfa2-8bf1-11dd-8a4c-0000779fd18c.html

John Brock October 1, 2008 at 2:03 pm

It’s doesn’t take a rocket scientist to see that borrowing money to meet payroll or pay bills is a recipe for disaster; a sign that the business is weak and in danger and an action that is just postponing the inevitable bar some revenue miracle.

We have been riding the credit wave for decades and have accelerated our standard of living way beyond its true level. The wave crested and is now crashing down all around us. Absent credit, the American standard of living would plummet; not because credit is a great thing, but because it allows those who feast on it to “buy time” and “postpone obligation and “loss realization”” thus live beyond their means. But this comes at a terrifically heavy price, because individuals and businesses alike become indentured servants to their creditors often dying before they are debt free.

Easy credit is the worst thing to ever happen to this nation. It is destroying the very fabric of our economy and forcing citizens to live their lives as interest paying zombies, jumping from one balance to the next.

It’s a sad day for capitalism and democracy when a 19 year old can say “I wonder what it would be like to be debt free?”

The bailout is wrong, I don’t like it. The economics will not work. It smells of elitist protectionism and tastes like government gone wild.

fundamentalist October 1, 2008 at 4:28 pm

Check out “So What Happens After the Bailout?” on Yahoo. I think Blodget has it pretty well down.

U October 1, 2008 at 6:25 pm

First they run over us, drag us down the road than they back over us, and drag us down the road.

U October 1, 2008 at 8:45 pm

Let every man, every corporation, and especially let every village, town, and city, every county and State, get out of debt and keep out of debt. It is the debtor that is ruined by hard times.
Rutherford B. Hayes

There is a place for credit in a free market economy, but in this case most of all the people eating only Doritos for money for almost 100 years! No wonder the economy is sick.

Bill October 1, 2008 at 8:45 pm

The point is that there is money out there to be had at any level and it is not just the counterfeit money created by the central bank. At the top there are Buffet, Gates, Walmart, Exxon and like. At the bottom where the action really is there are countless relatives and small businesses buying and selling equity and inventory or lending it to make a buck.

Futhermore, there is more employment outside of major financial institutions. The US economy has more people working for businesses owned by women than work in the fortune 500.

Our government is using the slow growth decades of recession playbook of Hoover and Corporate Japan. We should look to the wealth generators in the economy and get government out of the way by stopping wars first and reducing taxes and regulations second.

U October 1, 2008 at 8:54 pm

First they run over you, drag you down the road than they back over you, and drag you down the road and I
and we pick up the money that fell out of your pockets
off the rode. Go value investing!

U October 1, 2008 at 8:54 pm

First they run over you, drag you down the road than they back over you, and drag you down the road and I
and we pick up the money that fell out of your pockets
off the rode. Go value investing!

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