Cash is King
One of the biggest themes contained within the Societe Generale report in yesterday's post is that of debt. Debt levels are at historical highs for personal, private, and government sectors, in most developed countries particularly in the US. Paying our mortgages, credit cards, and car payments on a personal level can leave little or no wiggle room in our personal budgets. The same is true for governments as debt levels leave fewer, often unpopular, options of raising taxes, reducing expenditures, privatizing industries, devaluing of currency, or defaulting on the debt.
Total US consumer debt now stands at about 130% of disposable income (105% of GDP). Prior to the 20-some year long credit boom, it averaged 60%-70%. In order to get back to those levels – assuming they reflect some sort of equilibrium – consumers would have to pay down an amount of debt equal to 65% of disposable income. To achieve that in just two years would require a jump in the savings rate above 30%. That is close to impossible. What if the savings rate stabilizes at 7%, which is near current levels? Assuming that all the savings are used to pay down
debt, and that nominal income remains stagnant, it would take over nine years to reduce debt/income ratios to the levels seen in the 1980s. – Societe Generale
The Debt Hindrance
The rise in debt has caused systemic ripples throughout the graphic arts industry. The credit lenders were the first wave where only the most credit worthy could receive loans under less than ideal terms. The credit market has somewhat loosened but companies with substantial cash reserves can make acquisitions far easier than those without. This wave has had a crippling effect on shops, thus vendors, trying to make capital purchases in software, equipment, and infrastructure.
The reaction to higher debt levels is now causing the second wave. The reaction has been to save and pay down the debt levels. Although good for the future, the increased savings levels depresses a turnaround in growth. The cycle starts with consumers saving more and spending less, then revenues fall at companies who in turn implement cost control measures. Lastly, the decreased spending means less of a share for auxiliary businesses and supporting services until the whole equation is rebalanced.
Printing firms, with high capital expenditures, have also been keen to the issue of debt. Printers who do not mind their cash flow often find extreme difficulty in servicing their debts. Mounting debts can have catastrophic consequences if left unchecked up to the closing and dismantling of the business. The result is to keep an eye on managing debt loads while still planning for the future – a true balancing act.