Enemies of Liberty are ruthless. To own your Liberty, you'd better come harder than your enemies..

Wednesday, June 20, 2012

Credit-to-Cash-to-Credit Cycle

Monetary systems have been based on debt (credit) since long before coins came into existence.

I will give you 4 chickens when they hatch for a bag of feed today.

Things generally work ok so long as lenders properly vet borrowers and make only sound investments, and so long as borrowers possess self-discipline and do not borrow more than is reasonable.

The real problems began when slick money-players started selling debt as an asset. Once that began, the debt sellers began packaging debt that was of less and less value - like the debt on a McMansion lent to a 5-figure-income family. The seller of the debt knew it was a time-bomb, but it would not explode until it was on someone elses books.

When common sense is abandoned by lenders and borrowers and the buyers of debt packages, the fractional reserve system must fail, as we are watching now.

On the ground in Greece right now we can see the future. A great many companies survive on short-term debt. For instance, the company does a job and must wait 90 days for payment. But to get the job the contractor must front the cost of material and salaries, and other overhead. So the contractor gets a short-term loan from his bank to cover things for that 90 days until they get paid.

When everyone pays on time, no worries.

But what happens when the bank decides not to lend the contractor the money he needs to cover the 90 days? The contractor must weigh factors and decide if he should cover the 90 days with his own money. What if the 90 day mark arrives and the payment never arrives? This is where businesses fail.

I run all of my businesses on a cash basis. You have direct experience with this process with the 527. I pay for sweatshirts when we have sufficient orders to cover the cost. I do not go to the bank and ask for a loan for a quantity of sweatshirts that may not sell, nor will I go into my own pocket on spec. If the sweats don't sell, the bank doesn't want to hear it - they want their money.

In my contracting business I demand far more deposit from customers before I will accept the job than do my competitors. I collect enough deposit to cover all of my expenses for the job, so the customer only owes me the profit margin. This way I do not need credit accounts with my suppliers and I can't get into a credit/cash crunch. Yes, I lose a few jobs over this policy. But I do not lose money. And believe it or not, the State has a problem with my business model - they mandate that contractors may not collect more than 1/3 of a job's total price. The State claims that is a device to prevent consumers from being ripped-off. I'd bet my butt if we dig deep we'll find a banker pushed for that regulation/law, so he would not be cut out of the process.

We are going to encounter a rough economic adjustment as the bad debt must be worked out of the system. It is happening in Greece right now: No cash, no product.

For a while their economy will have to work on a cash & barter basis, which will be the only way to purge the debt. Debt holders will have to take their medicine at some point. If you make bad loans, eventually, you run into loans that will not be paid. Even Governments can't fill the gap long enough to avoid the adjustment.

There will not be a Mad Max adjustment, at least not in America. There will be considerable discomfort for most people as we fall back to a prudent cash-only economy for a while, until people begin lending again. And people will begin lending again, as they always have, but they will go back to the proven method of lending only to folks who will pay the loan back. (Lending for interest is an essential function of development. If rich guys do not risk their money on start-ups, very few start-ups can ever get over the hump of start-up cash requirements.)

How long will that adjustment take? A year? 3? 5?

In America we will have a simultaneous adjustment in our politics.

We will fall into the arms of Tyranny, or we will re-assert common sense once again and dismiss those who would be Masters.

How do you play your position? Horde as much cash as you are able, in as many forms as you are able. FRN's. Gold. Silver. Seed. Canned goods. Food. Water. Liquor. Cigarettes. Items of vice always trade well.

Have the means and the will to defend what you have. This is more important than any of the above items.

We are going to shift from a credit economy to a cash economy, then back to credit.

That chaos will be a window of opportunity for both Enemies of Liberty and Patriots to make political gains.

Prepare accordingly.

Here's the piece on Greece.


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