Why use more credit?

Recently, the Canadian government released radio commercials outlining the new credit card rules http://actionplan.gc.ca/initiatives/eng/index.asp?mode=5&initiativeID=47 ). What struck me as odd was that the current financial crisis, which doesn't show any signs of going away soon, was essentially caused by over-use of credit tied to the US housing market.

The following is a quote from the Wikipedia article on the financial crisis that sums up what happened:

 "Steadily decreasing interest rates backed by the U.S Federal Reserve from 1982 onward and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing construction boom and encouraging debt-financed consumption.[13] The combination of easy credit and money inflow contributed to the United States housing bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.[14][15] As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased."

You will note that I highlighted "encouraging debt-financed consumption". Thats for good reason.

The only people who benefit from credit and debt are the lenders and their associates in any economy and that means the banks, financiers and brokers. They benefit by adding service fees, commissions and other charges such as interest (for lenders) to what can be seen as imaginary money.

Its imaginary, because the borrowers and purchasers of loans, mortgages, etc. have to earn the money in the future to pay to the lenders what they purchased.

Tied to this imaginary money are thousands of what I call monetary performance instruments. Others call them financial instruments. They consist of hedge funds, GICs, RESPs, IRAs, 401(k)s, pension funds and dozens of similar items worldwide. Big businesses use these to finance their mega-projects which in turn employs thousands of people. In itself, this is probably a good thing, since employing people keeps the money flowing and workers from losing their homes.

But when this borrowed money ceases to flow, then things collapse as it did in 2007-2008. It creates a top-heavy debt load on the savings which lenders are allowed to use as seed money for the loans. For every dollar put into a savings account, banks can loan a certain amount per dollar for others to use. The same goes for money invested in monetary performance instruments. It spirals the debt upwards and upwards until thousands of corporations and investors can have money tied up in everyone else's pies.

So what is the connection between this and the new credit card rules in Canada?

Plenty, since the government sees fit to encourage more debt loads onto consumers, which is the large "c" conservative mindset in a nutshell. Spend, spend, spend is all they understand of the economy.

I propose that we use our savings, that means using already earned income, to purchase goods and services. While it would be difficult for businesses of the size of major construction firms or manufacturers to do this, it would improve the economy immensely if the average Joe did it. After all, it wasn't until around 40 years ago that consumer credit became easier to obtain for the average person. Until then, most people saved what they earned to purchase things. Credit cards and loans were rare.

In this time of Christmas spending, when shoppers can go over-board with gifts, this is wise counsel.

This is your ever-loving curmudgeon signing off for the day. Have a great weekend.