“What does it mean to your business when our government grows our national debt to hockey stick proportions?”
With D.C. locked in partisan bickering about raising the debt ceiling, part of the answer is dependent on the risk of that debt and the form of collateralization. There are three forms of debt collateralization typical in business: debt collateralized by past earnings or assets; debt collateralized by future earnings or cash flow; and debt collateralized by the likes of Bernie Madoff. When a company’s debt is projected to graph like a hockey stick, caution is warranted, when your government has hockey stick debt, extreme caution is warranted.
Another part of the answer is based on the strategy our country uses to extract us from our hockey-stick-of-debt lifestyle. Our current debate on the debt ceiling is not an exit strategy; it is somewhat like a discussion on adding a fifth mortgage to your home when you cannot afford the first four: a symptomatic component of our much larger, endemic financial disease. Another mortgage to pay off existing mortgages is just digging a deeper hole.
Unfortunately, current policy does not have a clear, sound, exit strategy to bring our nation back to a strong financial footing. So from here we postulate. Some potential tactics that could be combined into a debt reduction strategy include: austerity; growth; default; and dollar depreciation.
- Austerity, by itself, is not a likely solution for Americans, at least not voluntarily. While many in this country are currently taking that path, it is not by choice.
- Growth, no matter how desirable, is not a realistic solution given our current debt to GDP ratio and rate of growth. Math and history just do not support growing ourselves out of current U.S. debt.
- Default, at the level that would be needed to eradicate the debt, is something that would cause massive disruption in too short a time: we are having heart palpitations on discussions about ceilings that limit our servicing interest on our existing debt, let alone defaulting on the principal.
- That leaves dollar depreciation (inflation) as a likely dominant solution.
So what does an inflation debt reduction look like? If we reduced the value of the dollar by, say, 50-85 percent over a decade or two, we could pay down our debt with a fraction of the real value using deeply depreciated future dollars. Inflationary debt reduction is tantamount to default, and as an American this disgusts me. But as a businessman, I expect that inflation debt reduction most likely will be the strategy our country takes. Unfortunately, wages will not keep pace with inflation, so there also will be continued austerity.
Here are a few considerations for businesses in these complex times:
Austerity, like it or not, will continue to impact markets for some time:
1) Review credit policies;
2) Keep tighter controls on your AR, watch for receivable delays and take fast corrective action, consider increasing motivations for early/timely payment;
3) Be aware of the growing hardship that may impact your partners, customers and employees. While there will be opportunities for profit, there will also be great relationships born from appropriate compassion and understanding.
U.S. fiscal policy-makers are likely to continue to stimulate growth:
4) Look for appropriate opportunities with existing and future government stimulus. It is likely that we will continue to try to spend our way out of our economic woes, political will is weak relative to fundamental issues;
5) Review international market opportunities for growth, but be nimble.
Instability of the dollar is baked-in:
6) Relative to potential real price fluctuations, review inventory level strategies for both raw and finished goods;
7) Review your business in terms of more than just dollars, i.e. look at your business in terms of the cost of your raw materials or in terms of other asset classes to allow greater objectivity.
Keep in mind your role as a citizen of this great nation. At some point the consequences of our choices are going to fall on our children and grandchildren. There is great honor, both in business and as a nation, to produce more than we consume.