In 1950, retail profit margins were 100%.

That is double the wholesale price. Today, retail profit margins are generally 10% or less. During a recession they are negative. There is not enough gross profit for a retailer to pay expenses AND buy new inventory. So, they borrow short term to buy the new inventory. Margins are so tight, that during a contraction they borrow to meet expenses as well as buy new inventory. CIT and others have gladly filled this financial need. Now the retailers cannot repay their loans, and CIT, having borrowed through bond issuance, cannot pay timely interest payments.

CIT will not be the only lender caught in this predicament. If the Obama administration wants the private sector to take up the slack, it is strongly adviseable that the government keep CIT out of bankruptcy. Otherwise, there will be a long string of failures and there will be no private funding available to keep retail business operating.

Maybe that would be the quickest way out of this economic disaster. Let all businesses go under and completely kill off the global economy. Then it can be rebuilt from scratch, based on saving and investing. In the mean time, seven billion people will have no way to make a living.

oldbill

Related Posts:

• Retail woes: Thinner retail profit margins
• From the Drudge Report: The Economy is Even Worse Than You Think by Mortimer Zuckerman
• Government needs to fill up the gap for consumer spending to delay the collapse
• Don’t bet against America in the long run.
• As long as there is a belief that we are stabilizing and ‘turning the corner’ the market will march higher.

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