Walking along the High St yesterday, I saw yet another closing down sale.
It reminded me of this poster, which dates from Victorian times, before do-gooding had been nationalised. While the advice is as valid today as it ever was, it occurred to me that the poster could just as well be re-worded "I grew on cash - I grew on credit", the successful businessman having funded the expansion of his business through retained profits and the unsuccessful one having funded it through borrowing from the banks. Debt is so much part of our culture now, that I doubt many people give a second thought to how many businesses have been pushed over the edge by interest payments on the money they have borrowed.
Thursday, 19 August 2010
The Debt Culture
Subscribe to:
Post Comments (Atom)
20 comments:
Sorry mate. This is not a complete idea.
Most biz is pushed over the edge by RENT.
If they are pushed over ONLY by interest on the credit created as a buffer between starting up and successful production, that means the biz was a misadventure.
But again it is the RENT that kills them every time. I have the observed facts if you are in any doubt?
"If they are pushed over ONLY by interest on the credit created as a buffer between starting up and successful production, that means the biz was a misadventure."
My point is that businesses aren't just borrowing in the short term, many have permament loans and/or overdrafts. Anyway, in the past, you didn't borrow from banks to start a business, you borrowed from shareholders. Shareholders want you to succeed, banks don't give a toss, so long as they get their money back, with interest.
The debt culture is something new, whereas commercial rents are, by and large, at the same level as they always have been.
RS, Bayard has got it quite right. Look up 'Altman's Z-scores'.
Ground rents only hurt the economy if privately collected and/or landlords refuse to drop rents during recessions (unfortunately these are both the case).
A landlord is more likely to drop the rent in a recession than a bank is to lower its interest rate.
B, we can measure the truth or otherwise of that statement by looking at how many vacant business premises there are.
In theory, no shop or office would ever stand empty, as there would always be somebody who is prepared to pay something for it - which is why scrapping the Business Rates for empty premises is/was such a good idea, give those landlords a bit of a kick.
And banks have dropped their interest rates, that isn't the problem, the problem is that they aren't lending and/or businesses simply don't want to borrow.
Businesses are only ever pushed over the edge by one thing - costs exceeding income.
Rent, wages, taxes and interest are all costs, it is the total that matters not how the total is formed.
The difference between them is that interest and, to a lesser extent, wages are costs chosen by the business owner whereas rent and taxes are imposed from outside. Rent can be negoitiated with a sane landlord in times of trouble and wages can be negotiated with a sane workforce.
Interest is a particular problem because too often it is an unnecessary expense.
MW and Bay:
Once again an incomplete idea backed up only by theory(Altman's Z-scores) not the observed facts.
I talk to tenants all the time and they tell me the Landlord's are still demanding 30% increases in rental. Pray show me your Real Evidence, else retract your assertion and move on?
TFB: wages and interest are what is left over AFTER the rent has been taken out. See The Law of Rent
TFB: Agreed totally on "interest". But the interest banks charge is monopoly profit. Certainly an incorrect cost. It is not the real return to Capital as true Interest which comes only from doing work prodicing something
Bayard
"A landlord is more likely to drop the rent in a recession than a bank is to lower its interest rate."
Sorry to prove your theory is without support again by using observed facts. Actually plenty, most, vacancies are monopoly vacancies. The landlord is keeping them out of use, instead of dropping the rent to market, in order that the price of his remaining portfolio can still command the monopoly price. A rent way above the market rent. To drop to the market would cause a demand from all others to the new price. He cannot go there! Received from several discussion with both tennants and letting agents
Yes, in the end it all collapses, but only after significant devastation to the businesses, local community and finaly the landlord. Much like a war destroys wealth even if it were a just one.
Also banks are currently the worlds biggest landlords. "how would you like to pay your rent sir? 1) To the landlord as rent or 2) to us directly as so called interest". Even after default, they take a nice valuable piece of land. You see there is no "risk" for a bank when lending for land purchase. Its all updside. the people are the most stupid things you could ever imagine. We voted for more of it recently.
Observed facts!!!
My experiences in an unpaid advisory capacity to a commercial property owner (don't laugh)is that this sector is in a bad way and in some places people are giving tenants rent holidays or hoping for charity shop to move in.
But I am not talking about London.
I had to write an article once about empty offices in a north London suburb and the evidence there was that landlords were keeping property off the market to keep up rent levels in the rest (as Robin describes).
However this is only a small version of what the big house-building developers do: bank land and only release it in dribbles to maintain the current inflated prices .
There are business rates payable on vacant business property but no tax on land with extant building permissions that are being withheld speculatively.
Lesson? Capitalism is not always expansive and productive ; market freedom also means the freedom not to invest,but hedge into something safe and wait for an upturn ,which ,because they're not investing, does n't come.
RS, what I was talking about in my post was not businesses that have gone under due to landlords hiking the rent, I'm sure that happens all the time, but businesses that have tried to expand, perhaps to get over the VAT registration hurdle, and borrowed money from the banks to do so, as the banks urge business to do. Income has not been quite as forecast and the steady leakage of profits as interest payments have pushed them over the edge. I know the plural of anecdote is not anecdata, but I have worked for two businesses where this has happened.
Mark, interest rates are controlled centrally, your bank manager is not going to lower them for you if you go and ask him, however much he likes you, he doesn't have the delegation to do so, unlike the private landlord and his rent. Sure, there are big, corporate, couldn't-give-a-shit-about-the-tenant landlords, but there are no small, personal banks.
"The landlord is keeping them out of use, instead of dropping the rent to market, in order that the price of his remaining portfolio can still command the monopoly price."
I don't see how that works. Landlord lets premises at rent X to tenant A and rent Y to tenant B. Y is a lot less than X, but our landlord knows that something is better than nothing and otherwise the property would be empty. Tenant A's rent comes up for review, and A asks the landlord to reduce it to Y, or else he finds other premises. Landlord refuses, knowing it would cost A too much to move. Status quo remains. This is pure market forces. I think a much more likely explanation of why landlords don't drop the rent on empty premises is that to do so would devalue the premises and, he's borrowed money against the premises and would be in negative equity if he dropped the rent. And that would upset his lender, the bank. Either that or sheer greed and stupidity.
Bayard
Yes it repells the mind doesnt it. Yet many things do.
One can only "feel" this effect by going out into the real world and touching it. It cannot be done over social media which always rests on theory which sounds logical until you see the preassumed theory is false.
This is what makes poeple believe that Wages are paid from Capital and that there is not enough for a growing population a la John Redwood.
To help you understand this have you heard of the Upward Only Rental Review Process? RENTS ONLY GO UPWARDS
To call that market forces is a bit of stretch.
There are 3 classes of tenants in this scenario:
1) Excellent biz, ideal location high demand, speical privilege of monopoly of subsidy
2) Marginal biz, normal location, normal demand
3) Sub marginal biz, poor location, poor demand, no special treatment
I believe you are describing 2 in your example. They remain because they have no other choice. Hardly a free market. In a few years they will be sub marginal unless they either work their nutz off even harder, discover a miracle innovation or the population grows dramatically. But in the end they will be no better off. The landlord will raise the rent even more to take all that gain.
Yes landlords are as stupid as tenants. Have you ever watched upstairs Downstairs for an artistic analogy of this? In the end everyone suffers.
Why exactly LL's refuses to drop prices is neither here nor there. That they are capable of it when the demand is no longer there PROVES a monopoly market is in play. Do we need more evidence here ?
Are you a landlord by the way. Just interested?
Are you a landlord by the way. Just interested?
Yes, I am, although what I wrote wasn't affected by that. Incidentally, when I last tried to let the property I rent out, I dropped the rent by £100/month as there seemed to be no takers at the higher rent. If I'd been beating off potential tenants with a shitty stick, I'd have let it at the higher rent. AFAICS, that's market forces at work.
I'm not convinced of your argument that landlords never drop rents (quite apart from the fact that I'm a landlord and I do, when necessary), nor can I see how you can claim that a market with many different sellers of all sizes is in any way a monopoly. I'm sure cartels abound, but those cartels are still in competition with each other.
"I had to write an article once about empty offices in a north London suburb and the evidence there was that landlords were keeping property off the market to keep up rent levels in the rest (as Robin describes)."
I can see how reducing supply in that way can keep prices high, but if the proportion of empty properties goes above a certain level, then the landlord is cutting off his nose to spite his face, as the loss from the empty properties is greater than the loss from letting a few at a reduced rent. Personally, I think other forces are at play, but I don't know what.
DBCR, I don't doubt what you say about developers, but I think that development land prices, like house prices, are far more governed by the ability of people to pay than supply and demand.
@Bayard
At least you do not share the incredulity of Michael Gove who in his contribution to the now enacted
Rating (Empty Properties)Bill of 2007,could conceive of no circumstances under which landlords might withhold commercial property from the market (which this Bill explicitly targeted).
"The basic premise of this bill is that owners are deliberately keeping property empty.Who (are) these remarkable individuals or odd companies who (want) to earn less than they could every year?"
Fortunately New Labour was a lot more worldly-wise than he and the Bill was enacted a month later removing the 50% relief for commercial property empty for more than three months.
If only they had imposed a similar charge on residential land plots with planning permissions unbuilt on after three months!
New Labour made strange pseudo
Land Tax noises and gestures from time to time but lacked consistent impetus.
Observed facts
Northern Crock was ruined lending on land purchase.
Al
Bay:
Landlordsd DO drop rents in the end. After the damage has been done. To ALL concerned including themselves.
Like I say thats like a war. The common stock of wealth deprecitates significantly in the attempt by monopoly interests to grab all they can. You can only steal so much before collapse.
Are you a commercial LL? And how many tenancies do you have? I dont mind pursuing this line as we will get there in the end. Its simply a matter of unravelling it all stage by stage in each case. I call it a "theological audit"
Bayard:
Oops
"I can see how reducing supply in that way can keep prices high, but if the proportion of empty properties goes above a certain level, then the landlord is cutting off his nose to spite his face"
This is exactly the point I made earlier. LL's and tenants are the most stupid people I have ever met. Yet we think they are smart so cannot possibley do stuid things. Well evidently they do
One has to work to produce wealth. Stealing it is always destructive. ALWAYS. A law of nature.
@Anonymous
Got any more information on this aspect of Northern Rock debacle, references etc?
Lehman Bros bet everything on a huge property development in Bakersfield which went horribly wrong.
The merger acquisitions aspect of this is not being mentioned (aka private equity > asset stripping).For decades shares of largish going concerns (mittelschaft operations) were bought on credit ,then the factories and premises were sold off for housing and the assets generally pillaged.When Charles Clore started leveraged buy-outs and the sale and lease back of the chains of shoe-shops owned by shoe manufacturers he'd bought up, the Board of Trade was very enthusiastic and,indeed,Clore was not as bad as the out-and-out asset strippers that evolved,making a sincere attempt to keep the manufacture of shoes going.Unlike the real asset strippers who came later who just closed firms down and "realised their assets".All on borrowed money.Look at Manchester United.
I can never understand why the Conservative Party was so sanguine about the asset stripping era.One of their ministers Peter Walker was a mainstay of Slater Walker that became an asset stripping cause celebre later on.
Another example of how capitalism does not automatically increase production
Bayard
Just to say I'm not having a dig at you. You may be interested in this post. You may fall into the category of landlord in the second to last para. Sensible landlords do exist, but are rare where it matters.
http://gco2e.blogspot.com/2010/05/you-are-landlord-too-hypocrite.html
I'm baffled as to why the facts here are perplexing you still. Particualrly given they come from several different sources in this post alone. I trust you are not asking for "infinite evidence"
DBC
Would it be fair to say your are confusing Capitalism with Monopolism here?
OK a rose by any other name etc etc...
I mean it is not Capital that is the problem in itself. Isn't it the concentration of capital, - that can only ever concentrate when private property in nature is a primary social institution - when used to command a monopoly through buying power and market cornering, that is the real problem here. Such as with Tescopoly. I like your data BTW
Monopolism. OK Capitalism might be represent the same thing. Its just a word. It matters what is actually is. Either way I dont believe it is the ownership of Capital that is at the root.
If private property in Land did not exist, and so all people could choose to work freely for themselves, no amount of Capital up to infinity would be able to squeeze the worker and producer, nor corner a market. The real power would lie with the mass of free producers
Post a Comment