Thursday, July 14, 2011

Default Ain't My Fault

It's not easy to get a grip on this "debt ceiling" thing, but here's a thought experiment.

Suppose you're the CEO of a corporation. In many ways, the buck stops at your desk. But, you answer to a board of directors and there are certain decisions that must be made with the consent of the directors.

Business has been tough in the recession. Though you've done your best to control costs, there are some expenses which have resulted from investment in equipment and facilities while business was brisk. Like all busniesses, you financed expansion by borrowing. The payments on the loans are still due regardless of your current business level.

The problem right now is that you're up against the credit limit that's been established. You need to fulfill current orders and to receive the revenue for these orders which will allow your business to continue, and hopefully to weather the current storm. But, you can't pay for the raw materials, front the payroll, and keep the electricity on without borrowing a bit more money. The bank is willing... but...

You go to your board of directors and half of the directors absolutly refuse to allow you to borrow more money.

You argue that without the added debt, you won't be able to fulfill the orders, there will be no more revenue, and your creditors will deem you in default. Your only recourse at that point, will be bankruptcy. Most of your employees will lose their jobs, your existing customers will go elsewhere. This will be the death knell of the business.

Our country is a really big business. None of us want to go into debt further... it truly is a crisis. We do need to raise revenue, cut expenses and control our debt. What's going on in Washington right now, though, is NOT the way to do it. It's reckless and irresponsible to talk about refusing to raise the "debt ceiling." If you believe in free market, then you have to believe that MARKET forces, not POLITICAL forces, will set our debt ceiling.

As the CEO in the fable above, when the economy improves, I will do my best to repay the debt -- the interest is a drain on our finances, and any debt limits business mobility. If a directors opposed my request to extend our credit, I would suspect that they had ulterior motives... perhaps they've invested in a competitor, or bought into a hedge fund... or maybe they're just after my job!