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 Why is credit' the 'lifeblood' of our economy?

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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 12:33 am

ibis wrote:
Edo wrote:
and William Jennings Bryan and his vision of America being marytrd on a Cross of Gold?

Also wasnt there a massive collapse after reckless speculation on the railroads that resulted in a massive collapse of the US banking system and a great depression in which there was no growth in the US economy for 13 years straight in 1870/80/90's - all in the era of Laissez- faire and no government intervention?

Heck, there were regular banking collapses in the 1300's, Northern Italy - same problem, bad lending, compounded then by the use of specie and the absence of any lender of last resort. If one bank failed, it usually took the others down with it. It's fundamentally a result of fractional deposits - but places which didn't allow fractional deposits didn't become business hubs.

It's amusing/fascinating that such a thing as the idea of credit - a very advanced idea - could collapse today as it did then. It's kind of a wonder that it existed around then but then again it might be something that's always been around - "I'd gladly pay you Tuesday for a hamburger today."

It's a very advanced idea as it tries to balance inflation and business - too much and you get inflated prices and no one wants to work and too little hampers business. But it's wide open to corruption and ineptitude and oversight as a system.
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 1:20 am

Quote :
"I'd gladly pay you Tuesday for a hamburger today."

Very Happy
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 2:00 am

cactus flower wrote:
Quote :
"I'd gladly pay you Tuesday for a hamburger today."

Very Happy

That got me thinking about everyday examples of credit.

I just realised I extend credit to my employer by working all month and getting paid at the month's end.

Swapping rounds in the pub is offering and repaying loans.
Paying an ESB bill is effectively repaying a loan.

OK I'm getting silly now. Razz
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 2:14 am

EvotingMachine0197 wrote:
cactus flower wrote:
Quote :
"I'd gladly pay you Tuesday for a hamburger today."

Very Happy

That got me thinking about everyday examples of credit.

I just realised I extend credit to my employer by working all month and getting paid at the month's end.

Swapping rounds in the pub is offering and repaying loans.
Paying an ESB bill is effectively repaying a loan.

OK I'm getting silly now. Razz

No, you're quite right - and allowing "30 days for payment" is exactly the same as offering 30 days credit. The prevalence in late payments by large business to small in Ireland is essentially a huge loan from the small business sector to the large business sector.
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 2:20 am

ibis wrote:
EvotingMachine0197 wrote:
cactus flower wrote:
Quote :
"I'd gladly pay you Tuesday for a hamburger today."

Very Happy

That got me thinking about everyday examples of credit.

I just realised I extend credit to my employer by working all month and getting paid at the month's end.

Swapping rounds in the pub is offering and repaying loans.
Paying an ESB bill is effectively repaying a loan.

OK I'm getting silly now. Razz

No, you're quite right - and allowing "30 days for payment" is exactly the same as offering 30 days credit. The prevalence in late payments by large business to small in Ireland is essentially a huge loan from the small business sector to the large business sector.

It has to be 40% up front now before I'll show interest in a project. Mad
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 6:21 am

In my naive way I consider all money as IOU's. If I went and did work for a farmer rather than be paid in goats he issues me with a promissory note which I exchange for something that I actually want. The system works on trust and I feel considerations of gold and silver to be a distraction.

To kick start such a system someone has to issue the currency, without doing anything in the first place. As the economy increases in size more of these notes are required. The system therefore initially depends on debt, we borrow these notes and so the economy is lubricated, but to be charged interest on credit so produced seems absurd.

Problems therefore follow on from that basic position. Should we pay interest for the convenience of using this currency? Should people pay interest above (or below the rate of inflation) for money borrowed? What is the right amount of money that you need in circulation before the economy starts to overheat? If money supply is too small then we cripple the economy. Even within a well well regulated money supply you can get localised and specific bubbles as money drains from other activity. How do you lessen that possibility?


Edo wrote:
ibis wrote:
Don't know about anybody else, but as a self-employed sole trader I couldn't function without credit. This is partly because, like any other small business, I'm effectively offering interest-free credit to my customers until they eventually pay.

Particularly in the current climate, I'm minded to resurrect an idea for a 'late payers' website.

Couldn't agree more - the smaller your enterprise the harder it is to get your customers to pay before time or on time - particularly if that company is far bigger than you.

I've just had to clear a crate of industrial goods into the country this morning and had to pay the revenue 150,000.00 euros up front - I wont see the sale of these goods for another 3 weeks and after that it will be 45 days before the customer has to pay me after receiving the goods - I have a credit facility at the bank for just these occasions as the Revenue does not do credit! - but in between salaries have to be paid,overheads and utilities have to be paid etc etc - the company is solvent - but cashflow is a pure bastard.

Most companies fail through cash flow problems. Unless you own a business or are self employed you will not really appreciate the overall difficulty. Governments often taxes on goods not sold or money not received. I think that needs to change to tax on receipt. Also often governments are some of the slowest payers. How would the 'pay as you earn' like to pay part of next year's tax now?

With regards large businesses abusing their position, the problem is chronic and endemic, and goes well beyond slow payment. I am not sure what exactly can be done to redress the imbalance, but it is an important issue and should be addressed.

IMO the government would get a better return for their risk and time if instead of panicking about the banking sector they instead devoted time to improving the lot of small business and introducing measures and tax regimes that improved the cash flow and viability of that sector. That is the sector that is unlikely to get up and leave if conditions worsen.

rockyracoon wrote:
Every year more and more workers actually don't work for a company any more. They essentially work for employment holding companies such as agencies. There's no benefits, the pay is often poor and chances for advancement nearly non-existant.

Paradoxically much of this is driven by over regulation and placing costs on business that really don't belong there. One way of avoiding such liabilities is employing from agencies or short term contracts. If we as a society want types of social provision then we as a society should tax and pay for them. There is an increasing trend to shift responsibility onto business. This often falls hardest on small business.
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 11:20 am

cactus flower wrote:
rockyracoon - this isn't the answer to Akrasia's question but it is a very good answer to what has caused this economic crisis. . .

US living standards have been stagnant for 30 years and the last few Presidents have relied on expansion of personal credit to the middle and working classes to keep people disarmed, while the wealthy accumulated billions thanks to tax cuts for the rich, deregulation and wars funded with borrowings.

The money has run out and the wars can't be won. Is the panic and desperation from Paulson and co because they see their bolt money evaporating and the collapse of the dollar if the Chinese decide to cut their losses? . . .

Globalism is a double edged sword. There are trillions of dead money out there. I'm not sure that this time the government is big enough to bail them out.

CF, I have to respectfully disagree with you. How dare you! Evil or Very Mad Just joking. Smile Peace. Wink 'Tisn't a life and death proposition for us in Ireland. Could be a bankrupting one though.

After this piece of legislation, I find my own mindset changing. I just don't care anymore. If it works, fine. If it doesn't, fine. If it doesn't make one jot of difference, fine. I feel that the game, if you like, and the rules are set for others. Individuals aren't even a pawns in this game. If you've ever seen tuna feeding on a shoal of sardines, you'd get the idea.

My observations were on the micro (personal) and macro (national and international) levels in order to explore why credit has become so prevelant. Some would say the most prevelant aspect of modern society as in the new banking mantra - "too big to fail".

I'm assuming that by addressing the prevelance of credit I'm essentially addressing the main question why we don't live within our means. This may be where my observations break down in addressing the issue but I can't think of a better way.

I'm wondering why my grandparent hated credit, my parents used it very prudently, and until the last, say, 7 or 8 years I wasn't bothered using a credit card at all. Above the reason cited earlier, I think the penalties attached to credit may have an impact. The penalities in my grandparents day were really a matter of survival. Take out a loan which couldn't be repaid and they would lost the farm, literally. Real hunger was a possibility. In my parents day, they wouldn't contemplate using a credit card unless for convenience and the ability to pay it off immediately. Did they remember their parents possible penalties? Might have something to do with it. Are penalties today too lax?

John Hume (the only politician I have 100% respect for ever) stated that one of his greatest accomplishments was in helping to create the credit union movement in Ireland. So many people had been closed out from borrowing from traditional sources. The availability to obtain small loans based on savings patterns to allow especially women to buy labour savings device was seen as a sort of freedom. Has this been a double edged sword? It was a freedom but if abused through stupidity or necessity it become a financial chain around your neck.

The weekly pay check loan has finally hit the UK shore with a vengence. This is where many wage-earners can't make ends meet on a weekly/monthly basis and use their wage slip as collateral against exhorbitantly high interest rate loans. We're talking about people who need petrol to get to work, rent, paying for clothes and basic utilities but their wages no longer cover these costs. Strangely enough in the UK, this lending is done by the high street banks. Due to the high interest rates, the lending is done by "mom-and-pop" shops in the US. There is a stigma attached to this predatory lending. Of course, the big banks have no problem in packing loans into securities and selling them onto investors! (Source: Channel 4 news [uk] last week. May be able to find link on their website.)

As this post is way too long, suffice to say that on the macro level, I believe that the shortfall between national wealth creation and the aggregate desired standard of living has in part been thrust upon governments and in part been exacerbated by governments who see the necessity of personal debt creation as a method of maintaining the status quo. The price levels of all assets, eg homes, requires and incentivises individuals to take on more debt. This price levels, of a sort, maintain the picture that we in aggregate are somewhow wealtheir. Just look at the price of your house and the implication that home prices will always rise, ignore your debt, and you may feel like you're actually richer than you are.

Your observations, additions, deletions and indeed critique is welcomed as are any others.

PS Am I correct in saying that I'm off-base by looking on the wrong side of the coin, sort to speak? That the problems lie more in how we conduct life in relation to credit? Just wondering. gl


Last edited by rockyracoon on Thu Oct 02, 2008 1:08 pm; edited 4 times in total
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 11:37 am

think of interest as an insurance premium.

you lend money (or services) to 100 people. chances are 1 person won't pony up at the end. the interest charged covers the risk of non-repayment.

hence, the rates you pay on different types of loans vary according to your credit rating and type of security pledged (or mortgaged).
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 11:44 am

Whilst there is a risk premium built into interest rate, hence the yield curve on maturities, there is also a significant profit premium added or banks would be out of business pronto.
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PostSubject: Re: Why is credit' the 'lifeblood' of our economy?   Thu Oct 02, 2008 12:18 pm

true. but the systems and personel who transfer the money/push the paper don't do it for free.

i'll let you in on a secret.
there is no such thing as "free banking" i.e. no fees. the fees are built into the margin.
ironically, under ifrs, the fee element of income must be stripped from the interest element.
(due to the defn of interest being different in retail banking than in accounting(the more correct version))

look at your bank's p&l and take fees & commission over interest and thats approx the amount of fees built into your interest rate. its not a swindle, (the fees are not unfair) but a porky pie on the bank's behalf.
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