Right now I’m doing a little research on borrowing: whether personal borrowing is going up, down, or staying the same, and whether the velocities of those things have changed, whether corporate borrowing is going up, down, or staying the same, and whether the velocities of those have changed. I recall a paper produced by the Minneapolis Federal Reserve that showed that, at least as of the 3rd quarter of last year, there was no credit crunch. I haven’t been able to find an update of that paper. I’ve run into some anecdotal reports but not a great deal else. I’m finding this data devilishly difficult to ferret out.
However, just as a thought experiment let’s assume that there has been a substantial drying up of credit and both individuals and businesses are having a lot harder time borrowing money than they did, say, in 2006. What are the implications of that?
I’m more concerned with the implications for businesses of substantially less credit than there used to. Obviously, the financial sector will be greatly affected. I’d guess we’ll be able to get by with a significantly smaller financial sector than we had in 2006. I’d think that compensation in the financial sector would go down and any push effect that had on wages outside the sector would decrease, too.
I think it’s reasonable to believe that retail sales may be slowed for the foreseeable future since, based on our assumption, to the degree that stuff that was being sold was being bought with borrowed money not so much will be bought. Effective prices have risen.
I think there may be some other implications as well. For example, over the period of the last 25 years or so there’s been a lot of company-building via acquisition. To the extent that such acquisition was leveraged, i.e. done with borrowed money, presumably there will be less of that. And entities saddled with such debt will have greater difficulty in refinancing which I would assume would weaken them.
Will we see a lot of companies selling off these weakened pieces? Will companies be smaller? Will that have a depressing effect on executive pay?
It’s a lot to think about.
I’m soliciting ideas here. What will happen to businesses if the cost of borrowing gets high and stays high?