September 26, 2008Call off the dogs for a sec. It's time to take a breath
I am fatigued to nausea by folks who presume that as they have a case of bad gas, society would benefit by a whiff of it; bad gas, in most every case, being an opinion that has nothing behind it, other than the fact of its flatulent existence.
Right to left, on both sides of the radio dial and the blogosphere, one is subjected to the most screeching and most undisciplined cacophonous ignorance. It helps no one, really. Unless getting built-up emotion off one's chest counts. And in the present circumstance it damn sure does not.
Of course I'm talking about the financial meltdown we're told is just behind the shade of the bank teller's window.
Perhaps the most succinct explanation what is looming, or possibly looming, was provided by Pennsylvania's US Representative Paul Kanjorski on this morning's 8:30 AM (EDST) segment of Washington Journal, the C-SPAN viewer call-in program. (Unfortunately, as of this writing, the program had not been relegated to the archives. So those wishing to view the segment will have to cull the website for the link.)
Rather than provide the WJ play-by-play, recalling that the "economy's fundamentals are strong," I'm going to lay down a few Econ 101 fundamentals that hopefully will add some thought to an otherwise pretty discordant discussion.
Almost every hourly, wage- or commission-earning worker offers his or her services on credit, and gets paid on credit. Yes! they are different book-entries, a debit on one side and a credit on the other, on the respective books of the worker and the employer, but that is obfuscation for our purposes.
Let's suppose that you, as a worker, began your job with your current employer on the first of the month, and that your employer pays bi-monthly, on the 15th and the last. (To simplify, we'll stipulate that it's the 30th.) Because it takes time to process your hours, etc, you will not be paid for the labor you provided from the 1st through the 15th until the next pay period, the 30th of the month. You have thereby extended credit to the employer, with the full expectation of being paid for those 1st through the 15th days on the 30th. And to expedite your actual receipt and use of those monies, you've signed up for direct deposit at the FDIC-insured First Bank of Lowenbeholdweerfailing.
Your employer does not just keep bundles of cash lying around. It considers, as do you, deposited balances at its bank as the same as cash. Like you, it can access that cash via an ATM debit card or by writing a check. To reach an even more realistic example, let's use the example provided by Congressman Kanjorski, and stipulate that your employer is GM. That's right, the really big general, General Motors.
As with any business, GM earns income via product sales. Let us suppose two things here, to try to keep this as simple as possible. We're going to forget the dealer middleman part of this, and two, GM sold a vehicle to your neighbor for $30,000. GM won't actually have access to the cash it's entitled to until the financial institution your neighbor deals with, another bank or lender, transmits the right to that $30,000 to the financing institution that GM uses.
Money does not flow to any employer like river's steady stream. It flows in spurts, with very few being exactly like any other; perhaps a couple million one week, multiples of a million another week, and so on. On the other hand, GM owes a lot of different entities a lot of money, just to stay in business; glass companies, sheet steel manufacturers, tire companies, its own employees, etc. In order to cover the income/outgo gaps companies engage "commercial paper," short-term loans of 30,60/90 days. To make the system work, you've got to have a financial institution willing to extend the credit sought by what is in essence the borrowing company.
This morning, Representative Kanjorski said that GM was at, or very near the end of its line of credit! GM literally has tons and tons and tons of assets. However, it can't pay anyone - a supplier or any employee - in flywheels or crankshafts or fuel tanks, any more than an employee can purchase groceries or pay the mortgage or put gas in a car by pulling one of those GM parts, or any other part from the trunk.