The Wall Street Journalcarries the story, “Sales of Small Firms Are Up”. (http://professional.wsj.com/article/SB10001424052702303406104576444062140022104.html?mod=ITP_marketplace_4&mg=reno-secaucus-wsj) “Sales of businesses with roughly $350,000 inannual revenue rose 8% from a year earlier…”
“The main driving force isthe acceptance among owners that their businesses are no longer worth what theyonce were. Many sellers cut their askingprices and agreed to finance a significant portion of the deals themselves.
This is the other side of thelast fifty years of credit inflation. People are in debt, business is not good, and valuations have droppedsubstantially.
How do you like the story ofthe individual who bought a 200-seat casual restaurant in 2002 for $200,000 and“is finally selling it for just $75,000, and he is lending the buyer 25% of theselling price”?
More and more information isnow coming out on the situation in the world of small- and medium-sizedbusinesses.
But, this has been the casein the residential housing market. People are in debt, unemployed, facing lower incomes, and propertyvalues have plummeted.
This is also the situation inthe banking industry among the small- to medium-sized commercial banks.
The FDIC has only closed 51commercial banks through July 8 of this year, but this figure does not includebanks that were acquired by other institutions. Through March 31, 2011, there were 77 fewer insured banks in the bankingsystem than there were on December 31, 2010. (In all of 2010, there was a net decline in the banks in existence of290 even though the FDIC closed only 157.) With 888 commercial banks on the problem list the likelihood that therewill be 300 or so fewer banks in existence at the end of this year is highlyprobable.
My point is that this is apart of the debt deflation process going on in the economy and it is a naturalprogression from the fifty years of credit inflation that preceded it. (“CreditInflation or Debt Deflation,” http://seekingalpha.com/article/279283-credit-inflation-or-debt-deflation)
Of course, the FederalGovernment is doing all it can to offset the forces of debt deflation bycontinuing to pump more and more debt into the economy. Yesterday, Fed Chairman Bernanke, inCongressional testimony, argued that the Federal Governments needed to get its“act together” on the federal budget. Bernankefollowed this up by saying that the Fed will “do what it has to do” if theeconomy remains weak.
This was immediately interpretedby the “market” that the Fed will throw QE3 on the fire if it believes it isnecessary. Gold prices rose to a newrecord.
Today, Bernanke backed offand said the Fed was not “prepping” for a new edition of quantitative easing. Gold prices dropped.
The problem with the effortof the federal government to offset the debt deflation going on in the economyby more and more rounds of credit inflation is that much of the liquidity the governmentis pumping into the system is going offshore…that is, it is going into worldfinancial and commodity markets! (See “Federal Reserve Money Continues to GoOffshore,” http://seekingalpha.com/article/276909-federal-reserve-money-continues-to-go-offshore.) This is doing little or nothing to stimulatethe American economy and is doing lots to inflate world commodity markets.
And, in this condition ofdebt deflation we see one of the real confusing issues connected with creditinflation and debt deflation.
To take a specific example,in the 2000s there was a terrific increase in the price of houses and the valueof small- and medium-sized businesses, in asset values. Yet, price inflation, which is measured interms of flow price…rents and business cash flows…did not increase at the samerate. Hence, it looked as if consumerprice inflation was being kept quite low.
Now, we see just the oppositehappening. Price inflation seems to bepicking up, yet the value of assets like homes and small- and medium-sizedbusinesses are declining, sometimes quite precipitously.
In a period of creditinflation, asset prices tend to increase more rapidly than “flow” prices andthis dis-connect must ultimately be corrected.
In a period of debtdeflation, asset prices tend to decrease more rapidly than “flow” prices andthis tends to continue until they are brought back more nearly into line (orover adjust).
The actions of the federalgovernment and the Fed seem to be having little or no effect on assetprices. Owners of businesses (and houses)are forced to accept “that their businesses (and homes) are no longer worthwhat they once were.”
Further rounds of creditinflation may moderate the downside of this move…but, continuation ofaggressive credit inflation will only just postpone the adjustment that is needed in the economy until a later time.
