Lessons From the Front Line of the American Economy
Jun 9, 2009 – We are on the front lines of the American economy. As Small Business Consultants, we work with the lifeblood of the American economy, which represents over 90% of all employed people. Our clients are business owners, people who work hard and provide a product or service to their customers. They employ millions who depend on their companies to put food on their tables. The business owners pay their taxes, meet their obligations and manage their business within a budget.
Because of the service we provide (Business Debt Restructuring and Mediation), we see our clients at a time when they are most concerned about the viability of their company. They have creditors calling, and they have minimal cash flow to meet their obligations, usually due to the slowdown in their sector of the economy. So, our clients do what most families have to do in the same circumstances… they tighten their belts. They decrease costs, reduce overhead, and in some cases, they make payroll cuts and even lay off employees.
It has been said that our Government can take a lesson from the small business owner. For the sake of comparison, the Federal Government is facing a slowdown in receivables (according to the American Institute of Economic Research IRS receipts are down by 34%). We are in unprecedented times. The national debt has ballooned to almost $12 Trillion. We are surviving because other countries, most notably China, are continuing to buy our debt. Any lack of confidence in the credit rating of America now sends shock waves through the financial markets worldwide.
While the current administration has justified certain bailouts of U.S. companies (AIG, GM, Citigroup, etc.) as “too big to be allowed to fail”, the same can be said about China investing in America. China has too much money invested in the U.S. and cannot afford for America to fail. After some of our elected officials completed trips to China over the past week, a reality is starting to seep into the D.C. mindset. As discussed on the Daily Reckoning Blog “Simply stated, AAA credits do not repay their debts with currencies they print for themselves; they repay their debts from the proceeds of profitable capitalistic enterprises.” The fact is, the U.S. is printing money to fund our deficits, thereby reducing the value of our currency. Many have said that this will lead to high levels of inflation. Remember the old proverb “water always finds its own level”. Inflation (and some say hyper-inflation) is imminent. Unfortunately is a matter of when, not if. The rising cost of crude oil (today reaching $70 a barrel) may a harbinger of things to come. We can expect oil prices and food to increase in the coming 1-2 years. The biggest concern however is the national debt.
As Bloomberg reports, “The deficit should reach $1.85 trillion in the fiscal year ending Sept. 30 from last year’s $455 billion, according to the Congressional Budget Office. Goldman Sachs Group Inc., another primary dealer, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year, almost four times the $892 billion in 2008.”
Federal Reserve Chairman Ben Bernanke is starting to sound somewhat bearish about the U.S. prospects for recovery. In fact, he is now ringing alarm bells in regards to the astounding levels of debt the U.S. is now racking up. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke continues his testimony, “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”
While the Federal Government is printing and spending money that doesn’t exist, companies are starting to realize that any perceived “recovery” may be not take place for years, not months. While the country is “out of money” (as quoted by President Obama), there are even more plans to increase spending with additional new stimulus packages, health care and other programs being planned and quickly implemented. The answer to fund these programs is to reduce tax incentives which will be more costly to businesses and thereby reduce, not increase tax revenue. Companies will simply move off shore, as demonstrated on June 4th by a statement from Microsoft Corp. C.E.O. Steve Ballmer: “We will move jobs out of U.S. if this tax plan passes”.
These unsustainable debt levels will have a continued detrimental effect on business, as interest rates will eventually have to increase in response. This will cause any available financing (which is still not widely available) to become more expensive. Therefore, companies will not be able to acquire capital for hiring, equipment and investment. This will therefore result in further layoffs. Bloomberg reports “The U.S. may suffer additional “sizable” job losses, Federal Reserve Chairman Ben S. Bernanke said this week in testimony to lawmakers. While economic growth will return “later this year,” he said, unemployment will rise “into next year.”
This article is apolitical (concerns over deficits cross party lines). We are not interested in winners and losers. We are concerned because the decisions we are seeing come out of Washington are relegated to political ideologies, some of which are old, outdated and frankly quite dangerous. This has a direct effect on our standard of living and strength as a country. The willingness of our politicians to make tough choices is not evident. Tough choices mean politicians and economic advisers need to demonstrate counter intuitive behavior which puts the reality of our current fiscal situation ahead of their own interests. This is rare among the self-serving groups that have permeated our Capitol for several generations. We need our elected officials to put country ahead of party. To put aside power-grabs and paybacks to political action committees; to risk disappointing campaign supporters and fundraisers; to do what is right.
It is time for our elected officials, in both parties, to take a lesson from the backbone of America: The Small Business Owner. Do what small business owners are now doing to face this financial crisis … restrain spending and reorganize their debt. The Government can then make wise decisions to increase receivables by generating tax revenue through enterprise and tax friendly policies which will enable business to prosper at home and not seek ways to leave the U.S.