I am not an economist, I am the first to admit that I do not fully understand the current economic crisis in the US. What scares me more though is that I feel like people that are supposed to understand it don’t seem to either.
What has stood out for me though is just how much in debt this country is. I’m not just talking about the official US government but also the citizens and business owners.
The debt of ordinary citizens has been well documented. Credit card debt is out of control. Way too many people have taken out mortgages they can’t afford. Consumer debt is hurting our economy.
The thing that amazed me the most though is how much debt businesses routinely operate in. I’ve heard numerous stories in which businesses do not have cash to pay their employees, etc. They borrow money to meet these debts. So in other words, they borrow money overnight to meet payroll the next day or to pay for the load of steel.
Now, as I said, I am not an economist or business owner, so I am a little ignorant. Maybe this is how businesses routinely work and maybe it’s how they should.
The question is, am I the only one that this terrifies. If we did have a scenario in which credit froze and the flow of funds stopped, it would not be unthinkable that our entire economy could collapse.
Let’s use General Motors as an example, to be fair I don’t know that they use this practice, they’re just an easy company to use as an example. Because of the fiscal crisis, lenders freeze funds and GM can’t get their loan. They can’t pay their employees. This is a major hit to the economy, but we’re not done yet. They can’t pay Delphi, a parts supplier for them. Delphi can’t pay their employees and they can’t pay their suppliers, companies that supply them with components, steel, etc. These companies can’t pay their employees and suppliers and so on.
In a very few days the ripple is felt by retailers, the restaurant industry, the service industry because of the payrolls not being met at the manufacturers. These companies in turn cannot pay their employees and suppliers.
I realize that this is a far fetched scenario but with some of the events lately, I think it’s a conversation we need to be having. No matter how remote the chance, if the above were to happen, it would quickly damage our economy far beyond anything we have seen so far and it would do fairly long standing damage.
I just think taking a step back and thinking about how we conduct business in this country is not a bad idea. This high wire without a net act is a little scary.