Friday, April 2, 2010

A Positive Side Effect

One positive side effect of the recent financial debacle, and the drying up of credit, is that America may get back to a something we've not done in a while: exercise fiscal restraint.

With the easy credit markets, and many financial institutions and businesses living essentially in their overdraft protection, constantly servicing debt, as opposed to paying down principle, and taking out loan after loan to fuel expansion for the sake of, on paper, to "grow" while only spiraling further and further into new conditions of debt. While old loans are refinanced, the principle and the level of debt continues to weigh companies down. While conditions improve in the short term, many firms both small and large have been carrying what George Cloony's "Ryan Bingham" called his "backpack" and those backpacks being chock full of obligations that created decision trees that were predicated on carrying debt with them, and only looking for resolutions that kept them solvent, and what many called a "discipline of debt."

Now, we are faced with a "discipline of cash." Oddly enough, living within our means, and making decisions based on what we actually earn, and to think twice about our decisions about the long term consequences of spending. Instant gratification that our "easy credit" markets created led to decisions that were based on the assumption that we could just "roll over" our debt and come out without consequence.

And that led us far from the fiscal restraint and good fiscal decision making that created that boom in the first place. Credit, and easy access to it, made our businesses agile and quick to adapt to new markets.  Likewise though, we are now adjusting to a new reality where cash is king, and your business will grow only when you can afford to do so, not when you can "afford" a new loan, and hope to keep it serviced.  Call it restraint or austerity, but it means a firmer foundation for our businesses, and our investments. Or at least for a majority of the small businesses and the lesser sized companies.

The largest customers, they are still looking for new conquests. But from a economists' standpoint, the give and take, and relative lack of growth can be seen as a positive thing: stability for our markets. People living within their means, and only incrementally growing makes for a lousy return for speculative investments, but it is that very stability that can make for long term investments based on sound and thoughtful business practice.

It does go against the "Boom-Bust" cycle that the American economy was slaved to for most of its existence. Which wiped out many a fortune until finally measures were taken to enact protections that many firms have been fighting against, and looking for a lookey-loo around for some time.

It does mean that growth will be slower for some time for many. It means less opportunity to grow hard and fast, but living within one's means brings a stability that encourages confidence, and public confidence means a less rambunctious and less radical investment schemes.

Cross-posted to The Motley Moose

1 comment:

  1. The get rich quick schemes will always part fools and their money. But here's hoping that the prudent people have taken over the purse strings again in the larger corporations that essentially have been "keeping up with the joneses" of larger profits. Consistently paying a dividend and making the the most of what you have is the way to handle a business/ corporation.

    thank you for your insight as always.