Many complain about government borrowing and say that government should live within its means. But few complain about corporate borrowing. Shouldn't corporations live within their means?
From the semi-annual report of the AllianceBernstein Income Fund (Ticker AWF):
AT&T, 6.50%, due 2037
Ford Motor Co., 7.45%, due 2031
Citigroup, 8.50%, due 2019
Pacific Life Insurance Co., 9.25%, due 2039
Weyerhauser Co., 7.375%, due 2032
Borrowing does have its purposes, among other things having the capital for expansion or to smooth out cash flows. But how much borrowing is too much?
For example, Citigroup as of June 2012 had a debt to equity ratio of 3.024, that is, it owed bondholders three times as much as the value of shareholders' stock. See http://ycharts.com/companies/C/debt_equity_ratio. On the better side, General Motors had a debt to equity ratio of 0.3555. See http://ycharts.com/companies/GM/debt_equity_ratio. On the worse side, Ferrellgas Partners has a debt to Equity Ratio of 25.36. See http://ycharts.com/companies/FGP.
But why is Citigroup paying bondholders 8.50% when it pays savers 2% or less? See "Taking a Look At Citigroup's Latest Fixed-Income Prospectus", Rajiv Tarigopula, Seeking Alpha, 2012-07-11. Remember when savings and loans were required to pay 5% by law (which they used to justify not paying more)? And this 2% is not being paid for demand deposits, but three-month notes.
It gets even a bit screwier. Citigroup does offer a fixed-rate 15-year mortgage at 4.375 percent. So, it is borrowing at 8.50% to finance mortgages returning 4.375%. That doesn't sound like it's living within its means! See "Who Are the Best Mortgage Lenders for Bad Credit", Beth Lytle, eHow Contributor, no date.
Showing posts with label borrowing. Show all posts
Showing posts with label borrowing. Show all posts
Tuesday, August 28, 2012
Tuesday, August 02, 2011
"We have met the enemy, and he is us!"
Walt Kelly described our current problems eloquently through the words of Pogo above.
Thinking of these words was my reaction to "How Apple Would Solve the Debt Crisis: If U.S. were run like business, it wouldn't cut spending" by David Weidner, MarketWatch, 2011-08-02.
He wrote that rather being like Apple and looking to the future, we Americans are like a shrinking company like Eastman Kodak. We won't borrow money for growth or raise prices to meet costs. We have defeated ourselves.
To think that we have a Department of Defense to protect ourselves against foreign enemies, real and imagined, but we don't have a Department of Imagination, or a Congress of Imagination, or a President of Imagination, or a People of Imagination to protect us from ourselves. We have let our own, false rhetoric mislead us into a defeatist attitude. And it is being orchestrated by big corporations more interested in short-term profits than long-term growth.
Thinking of these words was my reaction to "How Apple Would Solve the Debt Crisis: If U.S. were run like business, it wouldn't cut spending" by David Weidner, MarketWatch, 2011-08-02.
He wrote that rather being like Apple and looking to the future, we Americans are like a shrinking company like Eastman Kodak. We won't borrow money for growth or raise prices to meet costs. We have defeated ourselves.
To think that we have a Department of Defense to protect ourselves against foreign enemies, real and imagined, but we don't have a Department of Imagination, or a Congress of Imagination, or a President of Imagination, or a People of Imagination to protect us from ourselves. We have let our own, false rhetoric mislead us into a defeatist attitude. And it is being orchestrated by big corporations more interested in short-term profits than long-term growth.
Tuesday, July 26, 2011
Who caused the deficit? Let the facts speak
See "Obama's and Bush's effects on the deficit in one graph", Ezra Klein, Washington Post, 2011-07-25.
Thursday, June 23, 2011
You can't argue with Tea Party supporters
Today's Duluth News Tribune had a rebuttal of my Tea Party Local View. See "United States on a fast track to tyranny". You can see it free for about seven days.
His first fixation is on taxes as being a sole driver of economic activity - "High taxes drive taxpayers out of high-tax states…" True if you consider only people who measure only taxes as a cost. These writers never consider that taxes buy us lots of things that drive economic activity. He ignores that many companies move to where skilled labor is available and that it takes taxes to educate and train people.
That bastion of free enterprise, the Wall Street Journal, published an opinion earlier this week that a company moving to the South (low taxes and anti-union) may be getting lower quality: "Boeing's Threat to American Enterprise: When major firms move to the South, it's usually a harbinger of quality decline. Why let that happen?", Thomas Geoghegan, Wall Street Journal, 2011-06-20. Sorry, you'll have to subscribe to see the whole article.
He gets on the tax and spend mantra and that much is paid for by borrowing. But why is the money borrowed? For two wars? For infra-structure investment? To bail out large corporations?
He claims that the "intent of our country's founders is obvious from their writings…" I guess he knows better than the Supreme Court, which over the decades has had difficulty discerning the intent. He completely missed my comment that first a slave was property and not a person and then property (a corporation) was a person. I didn't put in my article that these cases were Dred Scott and Citizens United.
He claims that we are on "the fast track to tyranny as we relinquish … our dollars and choices to government officials who supposedly know what is best for us." He ignores that we are still a republic and can vote these people out.
He missed my point about free markets being many players with sufficient information. He ignores that our free markets have devolved into a few players with the power to buy our government. Now that is tyranny!!
His first fixation is on taxes as being a sole driver of economic activity - "High taxes drive taxpayers out of high-tax states…" True if you consider only people who measure only taxes as a cost. These writers never consider that taxes buy us lots of things that drive economic activity. He ignores that many companies move to where skilled labor is available and that it takes taxes to educate and train people.
That bastion of free enterprise, the Wall Street Journal, published an opinion earlier this week that a company moving to the South (low taxes and anti-union) may be getting lower quality: "Boeing's Threat to American Enterprise: When major firms move to the South, it's usually a harbinger of quality decline. Why let that happen?", Thomas Geoghegan, Wall Street Journal, 2011-06-20. Sorry, you'll have to subscribe to see the whole article.
He gets on the tax and spend mantra and that much is paid for by borrowing. But why is the money borrowed? For two wars? For infra-structure investment? To bail out large corporations?
He claims that the "intent of our country's founders is obvious from their writings…" I guess he knows better than the Supreme Court, which over the decades has had difficulty discerning the intent. He completely missed my comment that first a slave was property and not a person and then property (a corporation) was a person. I didn't put in my article that these cases were Dred Scott and Citizens United.
He claims that we are on "the fast track to tyranny as we relinquish … our dollars and choices to government officials who supposedly know what is best for us." He ignores that we are still a republic and can vote these people out.
He missed my point about free markets being many players with sufficient information. He ignores that our free markets have devolved into a few players with the power to buy our government. Now that is tyranny!!
Tuesday, February 12, 2008
Borrowing from our grandchildren or ...
Many seem to have a misconception of borrowing, especially government borrowing, calling it borrowing from our grandchildren. The latest was "Road to ruin could be a high-speed rail track" (Star Tribune, Jan. 24). "Borrowing from our grandchildren" could be a good thing or a bad thing, depending on circumstances.
There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.
We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.
We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.
The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.
But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.
We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.
There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.
We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.
We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.
The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.
But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.
We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.
Thursday, January 24, 2008
Coincidence or campaign
Today I submitted an op-ed piece on "borrowing from our grandchildren" to the Star Tribune. This evening at dinnertime I received a call from the Star Tribune. I thought it was to verify that I sent the piece. No, it was a solicitation for home delivery of the Star Tribune.
I first said that I walked to the corner to get the papers because we were away too much for home delivery. The caller clarified that the special was for the Sunday Star Tribune. I declined saying that we had enough trying to read all the Sunday Duluth News Tribune.
Coincidence or what?
I first said that I walked to the corner to get the papers because we were away too much for home delivery. The caller clarified that the special was for the Sunday Star Tribune. I declined saying that we had enough trying to read all the Sunday Duluth News Tribune.
Coincidence or what?
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