Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Paul Krugman Would Fail as a Businessman

Economics / Economic Theory Oct 06, 2009 - 01:33 AM GMT

By: Eric_Englund

Economics

Best Financial Markets Analysis ArticleRecently, I traveled to Idaho to meet with several customers over a two-day period. As a surety bond underwriter, I predominantly deal with small-to-medium sized public works and commercial contractors. My objectives, for each meeting, were to gain a better understanding of local market conditions, to see if a viable business plan was in place for each contractor, and to determine which clients would survive this vicious economic downturn.


What became crystal clear, as a result of these meetings, was that financial decisions made during the economic boom will determine who survives this economic bust. Let me give you a hint: Paul Krugman, that channeler of John Maynard Keynes’ muddleheaded ideas, is dead wrong about savings.

Astute balance sheet management, in light of our current economic depression, has been the key to a construction company’s survival. Strong working capital, a strong equity base, and low debt are the hallmarks of a well-managed company – as revealed by its balance sheet. The most important component within working capital, in my opinion, is cash. Unlike what I was taught in grad school, cash is not trash; and my savvy clients know this. Cash is king and ever more so when construction revenues are dropping precipitously. Plain and simple, debts, expenses, and payables are settled in cash. Contractors who run out of cash, and have dismal prospects for picking up profitable construction contracts in today’s difficult economic environment, will fail.

So, do contractors view a buildup of strong cash balances as savings? Absolutely. My clients, who manage household finances in a conservative manner, typically do the same with their respective construction companies. When I see a contractor’s personal financial statement revealing low debt and enough cash (savings) to cover several years worth of living expenses, it is extremely likely his construction company has strong liquidity and little-to-no debt as well. Such companies, characteristically, have been profitable enough to accumulate significant cash holdings to the point where a large percentage of cash is not used for funding day-to-day operations. This "excess" cash is viewed as a rainy-day fund as seasoned contractors realize construction is risky and cyclical; and a strong cash position will help a contractor survive unforeseen problems including a down-cycle in construction.

To this end, during my recent Idaho trip, I posed this question to one of my most successful clients: "With a growing number of contractors struggling or outright failing today, what did you do differently than such competitors?" To me, his answer wasn’t rocket science; it was common sense and music to my ears:

From 2002 through 2007, nearly every contractor in the Treasure Valley was making good money in such a strong economy. Many of my competitors basically went crazy and bought extravagant homes, purchased motor homes, expensive cars, and even built ritzy office buildings for their companies. While they were borrowing and spending as if the boom would never end, my wife and I realized that our company was generating unusually high profits so we decided to save as much money as possible in our personal and corporate bank accounts. We knew this wouldn’t last forever and a day of reckoning would eventually arrive. Today, we are glad we saved as much as we did because our doors are still open and we have been able to keep our core group of employees. We’re in business for the long haul.

And what is happening to the contractors who went "crazy" during the boom years? Well, they are dropping like flies. I am bearing personal witness to this. Heavy real estate and equipment debt are now proving to be financially crippling to numerous contractors. (Be assured that there was a construction equipment bubble which closely tracked the housing and commercial real estate bubbles.) With commercial and residential construction in the tank, competition for public works projects is tremendously intense. Profit margins, accordingly, are razor thin. Poorly capitalized contractors are belatedly recognizing cash has been king all along. Now it is too late for so many contractors to recover from prior financial mismanagement. When cash holdings eventually evaporate, thanks to a lack of savings, employees are terminated and frequently the businesses are shuttered shortly thereafter. It is a gut-wrenching process to watch. It is going to get worse as I foresee countless contractors failing during this coming winter.

There is a lesson here for Paul Krugman. His Keynesian-induced distaste for savings is completely misguided. The contractors who borrowed and spent, spent, spent (corporately and personally) are going out of business at an accelerating pace. Not a single contractor spent his way into prosperity. Those contractors who worked hard, spent wisely, and built up personal and corporate cash war chests are going to survive this depression. They will continue to provide good jobs for themselves and for those fortunate enough to work for such financially conservative business owners. Saving, not spending, is the key to financial survival let alone success.

If Paul Krugman was a businessman and adhered to his own academic beliefs, be assured his business would go broke.

Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.

    http://www.lewrockwell.com

    © 2009 Copyright Eric Englund / LewRockwell.com - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in