Cheap money distorts the true cost of money and the goods being purchased with that money. It causes bubbles. The housing bubble, the new car bubble, the current College bubble. Say
sapphire sells 10000 new units and floods the market. We have a normal cyclical corrective downturn in the economy (this is guaranteed as markets are self correcting). Liquidity dries up again and the loan market freezes again. Suddenly SS can no longer find another lender to make these high risk loans. OK. No biggie for SS. They made there money on the way up on the units sold and an outside lender took the risk on the loans. However with a downturn in the economy (a bear market) all businesses slow. Suddenly the market is flooded with CC who should have never taken nor should the banks have approved and given a loan due to them due to their poor credit history. The market becomes flooded with used SS truck mounts for sale. This will destroy a small manufacture as demand normally slows during recessions and this will be compounded by the flooded market with near new low hour used machines for sale.
Now for the folks who do borrow this "cheap money". They will be left with a machine that is worth at best 60-65 cents on the dollar due to the market being flooded with SS truckmounts purchased with easy money and loose credit basis. However they still owe the bank the full loan amount plus interest. Suddenly via the courts the banks destroy financially and take all valuable possessions of the CC who took out that cheap money loan only a year before.
Cheap money = an economy in trouble. If the economy was recovering Ben Bernanke, the Federal Reserve Chairman, would not need to keep the rates at near 0. He would let them rise. He can NOT. We would go into instant depression. In addition the government could no longer pay for even the interest on our current debt as a nation. (reality check)
If the economy was healing banks would NOT still be holding assets on a Mark to Model vs mark to market accounting basis. This means they are using models that they used to project profit from before the crash of 2008. These models are being used to assign value to property for loans the biggest banks in this country hold. These values are many times 2,3,4 x what the actual market value or what the asset backing the loan would actually sell for if the bank put it on the open market. If the economy was healing this would not be allowed to continue.
If the economy was healing and cheap money is a sign of it, why has the dollar lost 10% of its value in the last 4 years. Yes, why did our government and banking sector through fiat creation of dollars need to steal 10% of all of our money via an indirect and underhanded tax on every real, physical and currency based assets we hold.
Yes, money is cheap right now..........right up until the point it is not.........then you have nothing when the illusions the MSM try to build every day get kicked in the butt by the reality that is happening right in front of us.
This is why I preach no debt.
The bank owns you and your stuff. Taking a loan is a bet. And you can loose more than your original investment or amount of money you borrowed. The reality is cheap money carries a much higher risk than money at a more normalized or expensive interest rate. Bubbles do NOT form in those sorts of environments. Rather innovation and entrepreneurship grow and prosper in those environments.
If the economy was healing the employment rate of the population would be improving. (not the Unemployment rate, that is massaged by an algorithm the government uses and can be found on the BLS.gov website...) The employment rate of the population is another figure the BLS puts out as well. It is just NOT reported in the Main Stream Media. To date their has been 0 improvement in that figure since 2009.
But dont take my word for it. Check out this Chart and short article from the NY Times.
http://economix.blogs.nytimes.com/2013/04/05/the-employment-rate/
Making loans to folks who under good market conditions would NOT be given credit is NOT a sign of economic recovery. It is a sign of desperation. In normal times banks have plenty of folks with decent and good credit taking loans. They would NEVER consider loaning to lower tear credit without insane interest rates and needed collateral. The problem is the folks with good credit are either tapped out and can not afford more loans, or are content keeping their affairs separate from the banking institutions to ensure they control their economic future, not some banker. So the banks are left in desperation with the bottom of the barrel high risk customers. All of this is symptoms of cheap money with a dollar that has been in constant devaluation for DECADES in this country and across the western world.
I think this is a good conversation. As small business owners we need to be discussing and aware of these sorts of topics as we move forward. I think that as small business owners we have some awesome opportunities ahead of us and that these are truly exciting times. I expect many, many opportunities for smaller and midsized firms who maintain low or NO debt and maintain high levels of cash reserves. Having high levels of cash provides mobility, flexibility, durability and absolute ownership under any economic climate. In one of slow decline, it provides opportunity to take advantage of the losses that those who did have loans to the hilt because "it was cheap money" will leave on the table.
