The Great Recession is Reducing Businesses’ Revenue and causing them to Default on their Debt

Posted by PITHOCRATES - July 28th, 2012

Week in Review

The Great Recession lingers on.  Because people don’t have jobs.  So they can’t spend money.  And when people aren’t spending money businesses can’t pay their bills.  Or service their debt (see More companies defaulting on their debt: 47 this year alone by Matt Krantz posted 7/24/2012 on USA Today).

This year, 47 global companies have been unable to keep paying the interest on their debt, which is more than double the levels a year ago, says Standard & Poor’s. A majority of those defaults, 25, are by U.S. companies…

This is happening despite record low interest rates that should allow companies to refinance and reduce their interest costs.

A long time ago an auditor once told me that bankruptcies rarely saved businesses.  For excessive debt at unattractive interest rates didn’t cause their problems.  It’s always insufficient revenue that couldn’t service their debt that caused their problems.  For if you have healthy revenue you’ll be able to service enormous amounts of debt at the worst interest rates.  Which is typically what happens during booming economic times.  Businesses take on debt at high rates.  Because they can then.  They take on debt based on what they can pay during the good times.  Not on what they can pay during the bad times that inevitably follow.

So excessive debt doesn’t cause their problems.  But excessive debt ultimately solves their problems.  Through bankruptcy.  And liquidation.  Unfortunately it comes with a rather unpleasant side affect.  The demise of the business.

So low interest rates aren’t the panacea the Keynesians think they are.  No matter how much faith our governments put into their Keynesian economists.  Who are constantly urging the government to lower interest rates.  But it doesn’t work.  Because borrowing money simply doesn’t increase sales revenue.  You need a healthier economy to do that.  One that is more business-friendly.  One that doesn’t kill economic activity with excessive regulation.  And one that doesn’t tax so much wealth out of the private sector.  So people can earn money and keep what they earn.  So they can spend it in the economy.  And businesses need a business-friendly environment with low regulatory costs.  So they can sell at prices low enough to encourage consumers to buy their goods and services.  This is how you generate real economic activity.  And until we have this environment the Great Recession will linger on.

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