Vendor Financing Gone Wrong
Gold/Silver ratio, Copper stockpiling, first hand report from US factory owner
Vendor Financing Gone Wrong
Ahead of the Global Financial Crisis companies like General Motors had their own yield curve. The company has issued debt at every maturity and its commercial paper was among the most liquid.
The company made much more money from financing its vehicles than selling them, which is great when demand is robust. It does not work very well when demand evaporates.
The crisis exposed two important lessons.
The paradox of the debt markets is that the most liquid debt is often that of the most prolific issuer. That also means those bonds occupy significant weightings in fixed income benchmark indices.
Good credits don’t need to issue as much debt, so their bonds tend to be less liquid.
Relying on vendor financing only works when there are plenty of customers willing to buy what you are selling.
GM was not alone. Its finance business model was the norm for other autos too. That ensured it was a candidate for a bailout.
Let’s apply the same logic to the US government.
The basic arrangement has been that the US consumer would buy the goods of global manufacturers. The USA would run large deficits and the currencies of manufacturers would be held in check by them purchasing US Treasuries.
This system works provided the USA is consuming oodles of what the rest of the world is producing, and they recycle their excess profits into US Treasuries.
The reality and threat of tariffs threatens this entire vendor financing arrangement.
If the USA is not going to run trade deficits with the rest of the world that means there is no incentive to recycle profits into Treasuries.
Without those purchases there is little to hold back the appreciation of their currencies relative to the US Dollar.
That compounds cost pressure on imported goods for US consumers. The tariff increases the price and it is paid for in a depreciating currency. That will reduce demand for imports even further. It could also cause a recession.