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Debt and the main line

By Daniel M. Ryan
web posted June 8, 2009

As months go by, the Obama Administration moves closer and closer to General Motors' "Fourteenth Floor" - or to a strategic-planning branch of the Office of the CEO. In a way, it's an inevitable process, even if one destined to derange both economy and society. Anyone who's taken a macroeconomics unit has seen a country's economy described as if it were a corporation; such is standard for the course. The elimination of "double counting" in the macro accounts is exactly the same procedure used to eliminate intra-group sales in a consolidated corporate group. So, it's no surprise that we're inured to thinking of a country as a company. There are even people who thumb-rule the value of a country's currency as if it were an equity share in the corresponding economy.

Timothy Geithner in China last weekThe latest small step for Tim took place in Beijing, in front of an audience. He said that Chinese assets are safe because the U.S. is committed to a strong dollar. Although it became notorious for the audience's reaction, it should be known for something else. What Secretary Geithner undertook was a thinly-disguised road show.

A road show, for those unfamiliar with financial terms, is a presentation made by a securities issuer. This presentation, also known as a dog-and-pony show, basically advertises said securities as a sound investment. One's normally undertaken by a company issuing new equity, or occasionally debt, but a road show is sometimes put on for an existing security. That's what the world saw in China.

The Debts And Lines Forever

A survey of U.S. public companies' annual reports will reveal something that a naïf, or an old-fashioned stockpicker, would find odd. More than a few companies have negative working capital, or more current liabilities than current assets. One company I looked at (name withheld) had less than 75 cents current assets for each dollar of current liabilities…and has been that way for at least five years, right through the crisis. In the olden days, a company was not considered safe unless it had 2 dollars current assets for each dollar of current liabilities. That's because some of those assets, most notoriously inventories, would fetch less than book value if they needed to be sold in a hurry. Nowadays, it's not that hard to find companies with less than a dollar of current assets per dollar of current liabilities. There are several utility companies that do so.

The magic ingredient that prevents creditors from shoving those companies into Chapter 11, which would have been done right quick as recently as the mid-1980s, is the standby line of credit. If any such institution faces a liquidity crunch, the standby line would be drawn on and the bills would be paid. Of course, this backup wouldn't be one if the credit line were cancelled or yanked. I'm sure you can guess which institution will be called upon if even a few of those lines were yanked in short order.

Yep, and there's even a precedent thanks to the recent financial crisis. It goes to show you: the more the government holds itself up as the strategic planning center for the economy, the more of the associated responsibilities get shoved its way. Tim Geithner is well on his way to becoming the Comptroller of the U.S. Economy, and his successor will be even more so unless the wind shifts. Nemesis, thy name is "managing the economy."

We've already seen that a bailout is becoming more than a quick economic fix. It's slowly mutating into an unwritten right, despite attempts on the part of both Bush and Obama administrations to clamp down on the associated moral hazards. The banking sector got it; the car companies didn't quite get it; many distressed homeowners got it. It's an easy guess that industrial companies will get it if a worse crisis cuts into Main Street wholesale. Given current Executive Branch behavior, the likely quick fix would be government guarantees on any needed credit lines. Some clever follower of Chairman Bernanke might even come up with a kind of "sterilization," the Fed's answer to off-balance-sheet financing. 

Deficits past and future all-but impel Commerce Secretary Geithner to polish up his presentation for future Uncle Sam road shows. There may be more laughter, perhaps some tears, but the ballooning deficits have added another line in the Commerce Secretary's unwritten job description.

In a way, he's the right party man for the job. It isn't just liberals who like to think of a tax break as a "tax expenditure," with the implication that the U.S. government has a reserved first call on all U.S. income. Holders of U.S. Treasury securities obviously prefer an implicit mortgage being added to a plain debenture. The Democratic Party may well be the Bondholders' Party yet; Paul Volcker, after all, is theirs. ESR

Daniel M. Ryan is an irregular columnist for LewRockwell.com, and has an undamaged mail address here.


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