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Monday, April 14, 2008

The debacling effects of debt

Americans, particularly those who have experienced the burden of debt, hear much about their lack of discipline and restraint and the consequences of debt. I do not think most people in debt have much to offer by way of an argument to justify their financial straits, meager wages and cost of living, notwithstanding.

We Americans hear of our government's debt and Washington's lack of discipline and restraint. Although there are abundant indicators of the seriousness of our problem, the bottom line is the course remains the same. Both political parties spend like there's no tomorrow whether for a war or social programs. Basicly, spending with promise of progress, but little or no profit, that is, there is no substantive change. Whatever "savings" are made on one side are spent multiple times over on the other side.

American business has, for years, been touted, even in the Sunday morning Bible class, for its discipline, exactness and efficiency. Alas, the steady stream of American business debacles in recent years and weeks, whether through greed or incompetence, shows no signs of letting up. Whether the debacle resulted in loss of financial investment or jobs there are real people who suffer the consequences.

I am neither the son of an economist nor an economist. I am heartend by E.F. Schumacher, the late world-renown British economist who had no kind words for his brethren in, Small is Beautiful. I do not profess a quantifiable understanding of the discipline. Yet, when the devastating effects of debt are all around us we begin to see the many faces of debt.

Remember Michael Milken the junk bond dealer of the seventies? The short story of what Milken did was he made access to big money, easy. Ted Turner was quick to seize the opportunity. He had some crazy notion about cable and was willing (and there were those who were willing to front the capital) to take on an unprecendented, history-making billion dollar debt to start up his company; a first in America. Then came IPOs and everyone who was looking for the fastest way to make a lot of money fast, found their heart's delight in many a corporation eager for their money.

Corporations do not call this debt. They call it, "shareholders". However, if you are using other people's money to finance your business in the form of stock, isn't that a loan of sorts? And, if it is a loan does it not make sense to pay it back as soon as possible once your family is financially comfortable, that is, pay back those shareholders? It is this "shareholders-as-creditors" that effectively shackle companies as to what and when they will do anything. As long as those shares are outstanding they are a loan to be serviced. The longer it goes without being cleared off the books it remains a liability to the company even as the company continues to earn profits which enable it to clear the debt.

This ought not be construed as anti-capitalism or some form of socialism. The problem is not with leveraging shareholders' money in a business startup. The problem is in sustaining that business with shareholder money. The effects of corporate sustaining this debt becomes evident sooner or later. Coincidentally, along with the effects comes the latent greed or incompetence, also. There's no mistaking, between shareholders and employees, who makes money for the company and who makes money from the company. Similarly, there's no mistaking which one, greed or incompetence, has played out on a man, a woman's, a family's financial investments or jobs in the aftermath of the debacling effects of debt in corporate America.

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