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B4 The Bell Humpday July 21


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Like it or not, apologize for usury all you like, the fact is it does absolutely guarantee the transfer of real wealth to the privileged few

On the contrary, it does quite the reverse.

 

To use less pejorative terms the cost of debt is always lower than the cost of equity which is in reality a function of the required return on equity.

 

Therefore risk takers will in aggregate over time significantly outperform the lenders thereby ensuring a relative flow of wealth their way.

 

Furthermore, by providing debt capital lenders are effectively helping to finance projects that would otherwise not have been able to get off the ground due to lack of pure equity financing thereby expanding wealth and economic activity.

 

This Old Testament critique of ?ursury? like the practice of stoning has no place in the world today.

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The cost of debt lower than the cost of equity? Maybe that's the way it should be, but it hasn't been that way for the last 20 years. Companies that produce no earnings have been able to raise all the capital they want and then some. The cost of equity has essentially been zero.

 

Paradoxically, it is also not true that over the long haul risk takers will outperform lenders. Over the very long haul (80-100 years), equity returns are hardly greater than the risk free rate of return.

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Major:

 

That's a pretty broad statement. I believe it's a fact that more businesses fail than succeed. Always have...always will. Increasingly so now.

 

Somehow the rich are getting richer and the poor are getting poorer. It's certainly not because the poor don't have access to credit. To state that the risk takers will significantly outperform the lenders over time makes no sense to me.

 

Buying a house or a car you cannot afford is a form of risk. With all forms of household debt at historically high levels, these risktakers represent the lion's share of the problem. SUV values will of course drop like a stone, as these are by definition depreciating assets (liabilities). Homes appear to be ready to do the same...in which case the payments for these former assets (now known as liabilities) will continue for years.

 

As for entrepreneurs...Are you prepared to enter into a long term lease on a commercial space to open a new enterprise in this environment? Are you prepared to secure that lease with your house as collateral? If so, what business would that be? What market is presently underserved and what concept do you have that affords a guaranteed ROI with low risk, significant differentiation and protection from competition, recession, event risk, increasing costs and decreasing discretionary spending in the household sector?

 

If you sign the lease, launch the enterprise, and discover that you are one of the majority of businesses that fail, you lose your house. Your money went to the building owner, and the building owner's money goes to the bank. The building owner now has an empty space in his building, and has to unload your house to get his money in order to pay the bank. He also has to find another fool to take your place.

 

The less disposable income that the bottom has with which to consume, the more businesses will fail. As the entrepreneur's fixed costs remain the same (or more likely rise), their variable costs rise, while their customers spend less. As more and more entrepreneurs are faced with this reality, more and more commercial landlords will find themselves in an increasingly difficult position, with increasing vacany rates and increasing overhead costs. The bank still gets their money, while the landlord gets increasingly pinched as a result of the increasing failure of his tenant's business concepts all tied to the reduced spending capabilities of the vast majority of citizens.

 

As this condition worsens, more and more "collateral" (homes and cars) are dumped on the market, as landlords and mortgage lenders rush to get as much of their money back as possible, causing downward pressure on pricing of used homes and cars. As this phenomenon works its way up the food chain, commercial buildings are dumped on the market as banks rush to get their money back out of the collateralized asset, before it becomes a liability.

 

It's very easy to see that the VAST MAJORITY of risk takers are nearest the bottom of the food chain, and the bankers are at the top. If more money flowed toward risk takers than banks, the risk takers would be at the top.

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