We have been told for years that too much credit is hurting the economy. Now the government wants to pay the banks debt so they can extend yet more credit to the poor. isn't that just making things worse. There isn't more money in circulation just more people getting deeper in debt that they cant pay. Or am I wrong on this. I'm not an economist I'm a survivalist just trying to under stand what is hurting us.

It isn't just the poor that are sucking up credit. Businesses rely on credit lines to purchase inventory, cover payroll, etc....Banks rely on credit to insure they have enough cash on hand to conduct their business. And, a lot of money that was in circulation, albeit on paper, has now vanished. Poof.

Credit in itself is a valuable economic tool. But it must be leveraged correctly. Very fundamental accounting practices teach how to read a balance sheet and get all nervous when the debt-to-asset ratio gets all askew.

Regardless, it isn't a failure of the credit system itself that is putting the squeeze on available credit now. In what one would consider a normal world, a lot of mortgages could default without the resultant ripple we're seeing now. Other financial instruments, centered around the mortgage industry, were used as investment tools by bundling the mortages in what looks like attempts to "hedge" mortgage failure.

Apparently, the concept of dependency amongst risks went right over the heads of the financial whizzes. Sure, if one or two mortgages went bad and unpaid, it wouldn't have a catastrophic result. What they didn't figure (the geniuses) was what would happen if a lot of mortgages started defaulting. Suddenly, the billions tied up in these arrangements turned into so much toilet paper. If the big banks suddenly are left holding toilet paper.....lending more of it out would place them even further into an "illiquid" position.

One can only hope the middle class suddenly swells as vasts amount of wealth disappear; yet not take us down also.

That's my take on it....in a nutshell.

Just out of curiosity. Is it possible to run a business paying with money you have, for inventory you need, and subsisting on the profit you derive from the trade itself, sales, services what have you?

Why MUST a business run 'on credit' and not 'on cash'? Is it a Commandment?

Or is it because using credit you can hide your taxable profit as 'cost of business'?

Originally posted by Maxmars
Or is it because using credit you can hide your taxable profit as 'cost of business'?

That would be an interesting way to try and keep a balance sheet, nevermind a cash flow statement. Difficult perhaps to enter "income" as an "expense".

Sure, I suppose it's possible to run a business with no credit. Incredibly improbable however.

Profit isn't what covers the payroll, pays for the inventory, the utilities, or the lease....cash flow is what does that. It is possible to run a business and show zero profit...as long as the cash flow pays the bills. What do you suppose would happen if the profit margin was a bit small for a week, sales were slow for instance, yet you still had to pay a full staff for a full week's work?