Saturday, March 14, 2009

Credit Card Cancer

Peter Schiff constantly rubs salt in the wounds of the economists in charge. His argument is that one should save and not rely on credit (cards) for a rainy day. Of course the government wants you to take out as much credit as you can and do the patriotic thing: spend, spend, spend. Good for the economy! But with the economic crisis the knee-jerk reaction of consumers is to save, not to spend. Even if the government gives consumers tax-credits or sends them cheques, the majority of the money goes back into mortgages, paying of credit cards, car loans and not into SUV's, marble kitchen tops, holidays, etc. With the decline in spending the economy will contract. As a result house prices will go down more and because of this the economy will contract, etc, etc. Do you see the solution? Not me! Other than 5-10 years of no-growth, failing industries, social and political unrest.

Credit Card Cancer

Peter Schiff
March 13, 2009

This week, with his pronouncement that "credit is the lifeblood of a healthy economy," President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

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.

The primary mechanism that has injected credit where it does not belong is the massive credit card industry that has developed in the United States over the last generation. The ease with which these cards may be obtained and the degree to which Americans now rely on them for routine purchases has created a culture of credit that simply has no precedent in a healthy economy. Until this culture has been reformed, America's fight to restore economic vitality will be a lost cause. link

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