What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster. FULL ARTICLE
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11 comments ↓
The problems we’re facing now are the result of too much debt, too much consumerism, too much borrowing, too much inflation…
And they want to “fix” it by having us take on more debt. Pure insanity.
That’s just what we should expect – more of the same to fix the problem. Which is going to make it worse, and require even more power for the government.
People retired on fixed incomes in a rapidly inflating world are caught in a cleft stick. Even if they can manage to break near even, they have little or nothing to put in savings. Every emergency requires cash or a credit card. There are few businesses who will negotiate terms. “Do you have a credit card, sir?”
For many, the cards are not a luxury, they are an emergency source for survival. Unfortunately, these are the people that drive old cars, that need fixing; have old homes that need maintenance, and have old, beloved pets that need the vet from time to time. Not to mention eating when a trip to the grocer for a few day’s food can be catastrophic, even when eating very simply.
I had to laugh the other day. We were at CostCo and out front were some rather gorgeous cars. One was a hybrid, sort of a mini SUV. We looked at the tag. $76,000, on special for $75,000! I told my wife, anybody who can buy one of these doesn’t need to worry about the cost of gas!
There are two worlds out here. One is composed of depression era babies, retired years ago on pensions that have eroded by half or more in purchasing power due to inflation, who scrabble along as best they can, with nothing saved for a rainy day as that was used up years ago to survive. They agonize over credit cards, but use them to cover emergencies, to keep eating. The other world seems to be of people who make huge salaries, but continually buy the latest and the most luxurious, even if it exceeds their income.
This is written, neither as an endorsement of credit, nor decrying the use of credit. It is just a reality check in a real, very tough world.
Steve, some very sad realities there. Obviously, for people in such situations, the only recourse is a line of credit. But, for the average american – who’s buying too many cars, too many houses, too many tv’s – too much of everything – on credit, they need to stop.
People on fixed incomes have to use credit in the way you describe because the government is ruining their security through inflation.
Let me ask you guys a couple of questions:
1) How did Peter Schiff’s company do in 2008? Didn’t he lose his investors upwards of 50% of their input? I thought I recognized the name and the name of his company. Last year I looked into his company, not that I had any money to invest, but I wanted to see what they were doing. Basically he had his investors putting money in Foreign Capital as I recall.
2) He talks of credit ( too much of it ) being the problem. I, not an economist, disagree. I believe that it is the abuse of credit action by the Credit Firms ( Financial Institutions ) that is one of the big problems.
When you have credit firms being allowed to hike peoples interest at will ( most firms can run the interest over 30% without batting an eyelash), and don’t think they aren’t doing that right now – most of them after they got Bailout Billions -from you and me. Michael you might recall I wrote an article about the fact that the CEO of Capitol One in the Financial statement of 2007 reported that the most income catagory was from penalties. They have 50 million card holders.
These actions can drive many families into bankruptcy and if that wasn’t bad enough, how many of you know that Insurance rates are tied to credit scores?
Thinking about buying a home in Little Rock in 2007, the Insurance Firm told me that my excellent credit score would save me about $400 per year on my homeowners policy.
I asked the man “What has credit got to do with the risk on a house getting blown away in a storm, etc. etc. He was taken aback and didn’t have an answer. So I went and looked up the rates of arson on Homes with Homeowners policies. Just like I thought, the percentage of Arson on homeowner insured homes was extremely small, and as far as I could think about, that is the only type risk to a home that credit might even affect the risk.
Then the light came on. Most Financial Institutions are wed to Insurance companies. The public fear of higher insurance rates would drive a percent of people to pay their credit debts better. What a coup, by tying credit scores to insurance rates, credit institutions and Insurance companies both increased their bottom line by one simple agreement and without adding any risk, tie credit scores to insurance rates.
Cliff, these credit card companies, and in fact, virtually every bank in this country – are completely corrupt. So, I’m definitely with you there.
But, as to the cause of the crisis in a broad view, Schiff is right on the money – and there’s very, very few that take that line too.
The US Government, and the US people have been spending far more than they take in for far too long. Sooner or later, those bills come due.
If you earn $10,000/year and spend $12,000 or $15,000 or some other larger figure, eventually, you’re going to be bankrupt. It’s a house of cards that can’t go on as it is.
(of course, you have to add in the easy money policy of the fed, the massive money creating by the fed and the corporate banks, destructive economic polices, and the like, but not enough space here)
What’s going to get us out of this mess is for some big financial companies to go bankrupt, and for people to start being more and more frugal with what little they have left.
That’s just the opposite of what the Obama team (and the previous administration) have been doing.
If you can get a copy, I can’t recommend any book more than Thomas Woods’ new book, “Meltdown”
Michael, you are correct and yet what I meant is that the view presented to the public – you’re spending too much, is seriously flawed.
What percent of the American public spends more than they make?
Answer: Almost none.
Well then how do they go into debt for more than they make?
Answer1: Taxes, It now takes the American wage earner, that’s the people who furnish the bulk of the Government income, to have to work half a year just to pay his taxes ( visible and hidden), and he has no choice in this other than to quit working.
Answer2: So it is almost impossible for him to spend more than he makes, but most would mean his money left after taxes, and a portion of that has to go for life sustaining needs, food , shelter, etc. Now he is down to a fraction of what he really made by working and what is left is discretionary spending. This is where he can get in trouble because of the Uncertainty of unanticipated expense which is answer 3.
Answer3. A major medical amount uncovered by insurance, a loss to a home not covered ( Like the hurricane Katrina fiasco ), increasing prices like happened last fall, loss of wages ( job) and many other unforeseen things like for example the doubling to quadrupling of credit costs as I mentioned above. These things are unanticipated. And with the little that was left the poor old wage earner has no wiggle room left. Along comes Peter Schiff to claim that he is not saving enough. He agrees, but is wondering if Peter knows what life is truly like on the bottom end of the middle class and how hard it is to save. Mabye if less was pried from him before he gets to use any of it, then the old boy might be able to save more.
Just some thoughts from one who has been there before.
As the economy worsens
Cliff, while you make some interesting points, you’re basing your positions off of a wholly incorrect assumption.
When you say – “What percent of the American public spends more than they make?
Answer: Almost none.”
Actually, the number of people who do spend more than they earn is staggering.
As of 5 years ago (remember, debt is far higher today) – over 40% of American families were spending more than they earn.
The government is even worse, and government taxes and inflation are a criminal abomination. But the fact remains, debt is a nasty problem in this country.
People need to stop buying junk. We have enough plasma tv’s, and cars, and appliances in this country to last lifetimes.
Otherwise a better option would be to eliminate the income tax – which is just stealing money from average people and giving it to corporations and bureaucrats. But that doesn’t seem like something that’ll happen anytime soon. So a real move would be to stop the overconsumption that this society has built a habit of over the last few decades.
Wait! I just re-read your comment, and I think I just got it! Ok, are you saying that if the government wasn’t taking so much from people in the first place, people would actually be spending less than they earn? Meaning – they actually spend less than their pre-taxed income?
If so, I think you’re really on to something there. And as I mentioned in the above comment, that’s a huge problem, but since we can’t really get around that too easily, in the interim (or the forseeable future) we have to learn to make due with what we have. no?
Now Michael you make a good point but when someone tells me that 40% of the American people spend more than they earn, I just have to disagree. And here is my rationale:
If my taxes are 50% of what I earn ( and this is about correct ), then it is impossible for me to spend more than I earn, unless the taxes are considered to be spending.
What is meant by that 40% “spending more than they earn” is actually “charging more than they earn”. Now what is meant by charging? Well we are talking credit – right? So if I buy a home at say $200,000 and the payment is $1500 per month, am I spending or charging?
What I am spending is the cost of shelter, something I have to spend whether it is rent or equity spending, either way it is not a discretionary spending, just the difference between what I need and what I bought is discretionary.
If an apartment costs me $1000 per month and the home purchase costs me $1500 per month then at best, $500 is the amount of “discretionary spending” I have done.
Same for groceries, clothing, transportation, medical, etc, etc.
I hope I made my point about spending too much and not saving enough. What I am saying is that the average taxpayer is being squeezed to the point that required spending ( taxes, shelter, food, etc. ) is taking up all but a small fraction of what is actually earned. If that mere pittance left is overspent ( Say he has 10% of his earnings left ) and he spends 11% of his earnings ( credit charges 1%) , then he has overspent, 1% of those earnings. Since the tax cost is about 50% of those earnings, I think Peter is blaming the “little guy somewhat much”. In other words the total great amount of money out there is being unwisely spent, not by the taxpayer, but by the tax collector.
Michael, you have seen the light.
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