Who Needs the Fed? by John Tamny

Author:John Tamny
Language: eng
Format: azw3, epub, pdf
ISBN: 9781594038327
Publisher: Encounter Books
Published: 0101-01-01T00:00:00+00:00

CHAPTER TWELVE

Good Businesses Never Run Out of Money, and Neither Do Well-Run Banks

Businesses, like people, seldom if ever fail solely because of a lack of money.

—Warren Brookes, The Economy in Mind, 172

IN JULY 2015, global Internet retail giant Amazon.com announced a profitable quarter. It registered a $92 million profit on $23.18 billion in sales.1

What is notable about the announcement is that since opening its doors in 1994, Amazon has regularly reported losses. Indeed, in its early days, in the midst of the first technology boom of the late 1990s, sarcastic commentators took to calling the company Amazon.org.

But, despite frequent quarterly losses, Amazon can claim a market capitalization of $296 billion.2 And even though it regularly loses money, its patient investors have in no way pulled their funding.

Amazon founder Jeff Bezos is engaged in constant experimentation. He employs thousands in what is called Lab126 who are charged with devising ways to improve the Amazon customer experience.3 Many experiments fail, such as the Amazon Fire mobile phone that proved undesirable to its massive customer base. Yet, investors have not lost faith in the Seattle-based company, as evidenced by its rich valuation.

In Zero to One, billionaire investor Peter Thiel noted, “The value of a business today is the sum of all the money it will make in the future.”4 Amazon carries a high valuation today because investors see all the experimentation in the present, not to mention Amazon’s willingness to lose money in the present, as positioning the retail innovator for a grand future of abundant earnings.

While things could change, Amazon, despite its earnings record, will not run out of money. Investors presently line up to fund Amazon’s commercial advances, based on their optimistic view of the company’s long-term potential. Investors appreciate Bezos’s vision, but if they ever decide he is moving in the wrong direction, his ability to access credit will plummet.

Still, it will never be a lack of money that fells Amazon. Only a lousy strategy will take it down.

Why feature Amazon in a chapter on banking? Because similarly banks never simply run out of money. Lack of investor patience is what causes them to file for bankruptcy, or to be swallowed by competitors.

Of course, that’s why the ideal banking scenario is one without requirements to keep 10, 5, or 3 percent of deposits in reserve, assuming a rush of depositors. Banks shouldn’t face any reserve requirements because well-run banks don’t need them.

If NetJets experiences a situation where more jet owners want to fly on their jets than it has available, NetJets can easily borrow access from other commercial entities (including plane manufacturers themselves) with an excess of planes. So can banks borrow excess cash from other banks, assuming their depositors come in en masse to take out some or all of their money.

Those who borrow from banks are constantly paying down loans they’ve taken out, but of greater importance is the fact that the deposits (liabilities) that banks turn into interest-paying loans are their assets. When a bank experiences a near-term cash shortage, it isn’t necessarily insolvent or bankrupt.

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