Thursday, February 26, 2009

Capital Expenditures Are An Investment


Today I would like to talk a little about capital expenditures, and how capital expenditures differ from operating expenses. The purpose of this little explanation is because a lot of the criticism of the stimulus package is just plain wrong. Here is why.

What is a capital expenditure? A battleship or an aircraft carrier is an example of a military capital expenditure. I think reasonable people would agree that a battleship or an aircraft carrier will last more than a couple of years. Building a bridge, roads & highways, a new electric grid are also examples of capital expenditures because they too will last more than a couple of years.

How do we finance a capital expenditure? Capital expenditures are usually financed over a period of years equal to the life of the utility of the capital expenditure. This long term financing in the private and public sector is done by the issuance of corporate bonds and municipal bonds. The Federal Government also issues long term bonds, U.S. Treasury bonds, that can be linked to projects that have a utility of more than a couple of years.

A start up company uses seed money for operating expenses because it has no income. The United States, federal, state, county and city governments have income through taxes and fees, and as the economy recovers, those taxes and fees will increase in amount as the recovery takes place. The taxes and fees will pay principle and interest and retire the debt. As new projects are needed, new borrowings will occur, just as new borrowing takes place in the private sector of the economy.

Concern about a deficit should have been under taken at the beginning of the Iraq War, as fighting the war should have been paid for out of the Federal Government’s operating income, taxes and fees. After the war is over there is no utility in what is left, unless Iraq is going to give us free oil for the next 10 years. The idea that Iraq was going to pay for the cost of the war should be revisited. If Iraq pays for the cost of the war to liberate their country, that would reduce our deficit considerably. Personally, I think that subject should be visited again.

Finally, capital expenditures are an investment. Corporations, governments and ordinary people, families, borrow money for major expenditures and pay for these expenditures over time. That is the way the world finances capital investments. The important thing to keep in mind is that we, as a nation, must keep our country competitive with the rest of the world and we must update and improve our own infrastructure. If we do not meet that challenge, we will have hell to pay.

Stay tuned.

6 comments:

winslow said...

The spending bill passed in Congress yesterday included millions in pork, both from the Republicans (40%) and the Democrats. This is outrageous. I read through the list and was appalled. What a terrible example of leadership. Every Congressperson that voted for this bill is only interested in pleasing their constituents and getting re-elected. We can only hope that Obama vetos this bill. This would certianly increase his status with the few fiscally responsible Republicans. But I think Obama will want to keep the Democrats and Nancy happy.
Any thoughts?

There is a program on CNBC, "The House of Cards". This program follows the beginning of the financial disaster and who was responsible. Of course, the rating agencies are given ample time! An excellent program. You will be amazed at Greenspan's comment at the end. I'm still bewildered.

Also, Cramer had a town-hall meeting with Sheila Baer of the FDIC last evening. Another excellent program. A very articulate lady. We need to see the Treasury Department do more of this...get in front of the public. Geithner is killing us....he doesn't seem to be articulate and maybe is afraid of publicity. The confidence has to be re-built in this country.

moneythoughts said...

I think that the reality is that there will be some pork. The only question is: can it imporve the infrastructure and create jobs in the private sector? If the answer is yes, I can't fault that. We need to repair and maintain our infrastructure. People must have confidence in the bridges they have to cross to go to work.

Sorry, But I miss a lot of good shows on TV. If anyone wants to email me about them before they go on, they can reach me at fdzigler@yahoo.com.

As for Treasury Secretary Geithner, I am also not impressed with him. Personally, I don't like his looks. There is something about the guy I just don't like. He doesn't seem like he belongs in Obama's cabinet. He speaks Chinese I read, so perhaps they can make him a trade rep to China to get them to buy more of OUR stuff. Volcker or Summers should be Treasury Secretary in my opinion. I think Paul Volcker deserves the honor and is equipped to do the job. But, politics plays such a big part for those top positions. Those are my thoughts.

Butch said...

I didn't know that Iraq was given a clean slate of a bill for the war. I thought that we were to recieve something in return. I must have been infatuated with Nancy's smile and missed the announcement somewhere along the line.

Darn it again!!!!!!!11

moneythoughts said...

Scientist in Kenya have found a foot print of a human that they believe is 1.5 million years old. Further research will determine whether the foot print belonged to a Democrat or a Republican. They figure the man could have worn a men's size 9 shoe. Would the Republicans claim a foot print that is 1.5 million years old, or would they prefer that a Democrat take responsibility for that too?

LceeL said...

'Millions in pork'? Only millions? At least it's not billions.

Maybe the complainers have forgotten the last 8 years already.

moneythoughts said...

There is the Republican Base as the talking heads refer to them on TV. They stick with their party's line to bash Obama and everything his administration does. Their problem is that they have no national leaders among them. Joe the Plumber is now the intellectual head of the Republican Party along with Rush? This is a chicken without a head still running around the barnyard not realizing that it has no head. Judging by Obama's ratings in the polls, I think enough Americans are waking up to the deception of the last 8 years.