Saturday, 15 March 2008

Economic Diet (Part 2)

America, certainly, is a land of the obese and overweight.

Despite the obsession with Size Zero among the anorexic Hollywood crowd, the average American is a great deal many sizes more than your waif-like A-lister. Years of supersizing on burgers, fries and shakes tell their toll on a population that is probably, pound for pound, among the most overweight in the world.

What is going on in their physical state is exactly mirrored in their economic affairs as well.

Maxed-out credit cards—the financial equivalent of obesity—seems to be the norm among most Americans these days. The availability of cheap credit to people who are not used to financial prudence has given rise to this phenomenon, and fuelled what could yet be a time-bomb waiting to explode on the world.

One of the problems with our modern eco-nomy is that it has become too complicated for most of our consumers to understand. And one of the most misunderstood elements is personal credit—manifested by the now ubiquitous plastic credit card.

As they were conceived, credit cards were meant to replace cash in financial transactions. Convenience was its key feature, in that consumers no longer had to carry and count cash and change whenever and wherever they shopped. The operative word here, however, is “replace.”

The assumption is that the card holder still has the “cash” to purchase something with, just that payment is not actually made with the physical cash during the actual transaction.

Herein lies the big problem.

Today, credit cards are not looked at as replacements for cash transactions anymore, but as “supplements” to one’s actual cash funds. In other words, with an income of $2,000 per month, and a credit card with a $10,000 limit, most would assume that they could spend more than their monthly cash income.

But how could this be sustainable. If one consistently spent $2,000 plus per month on credit card purchases, and yet earned only $2,000 per month in income, how could one possibly hope to pay for all of his or her debt?

The answer is—one cannot.

Many Americans carry perpetual credit card balances, which they just transfer from credit card to credit card, without any prospect of ever paying for it in full. In good times, this practice is OK for a while, but when credit tightens in the event of an economic slowdown, all hell breaks loose.

What America, and indeed most of the West, now need is a re-education in personal financial prudence. People need to get back to basics and understand what personal financial responsibility is all about.

Before the invention of credit cards, this huge debt problem that now plagues America did not exist in this magnitude. With the plastic economy that we have today, somehow the issue seems to be spiraling well out of control.

I certainly would not advocate banning all personal credit altogether, because it has its important place in a functioning modern economy. What I would suggest, however, is moderation from consumers in spending with credit, as well as from financial institutions in extending that credit.

With a little bit more responsibility from both sides, whilst we still will not be able to avoid economic cycles altogether, it will be one hell of a smoother ride, I can guarantee you.

Published in the Sun Star Daily, Saturday, March 15, 2008

No comments: