Sunday, July 12, 2009

Walk Out On The Debtor Cycle

Welcome to the world, 2009. With economic recession, complacency, factory closing, layoffs, government dependence? Welcome indeed.

We’ve all seen the commercials; most Americans now suffer from credit trouble. For those of you who don’t, we’ll be with you shortly. If not, then you’re extraordinary or lucky. What I wonder these days is if this is the rational path for capitalist expansion. Sure, credit is a valid idea, I want something, I agree to pay and you agree to give it to me for a fee. If I fail to pay you get it back. That’s all well and good. It helps the economy to continue moving when buying power is low. Since the system continues moving, then manufactures continue to see profit, so the job market remains healthy and companies expand.

This is all assuming we all continue to pay. But what happens when we fail, or worse, when so many of us fail that the industry becomes defunct.

Think about this, every American goes out and buys a car on credit. The Auto Industry seeing a sudden jump in demand expands their production. Then months down the line, the Americans all default on the loans. The Auto Industry and the Banks would be caught with the excess product and the returned product. Furthermore, all the profit margins the Industry believed were there suddenly disappeared.  Sounds a bit like the ‘never count your chickens before they hatch’ adage.

What is seems like these days, is a cycle in which one person’s job is dependent upon another person’s ability to have credit. And since the “credit bubble burst” less and less people have maintained good credit, therefore, less people have jobs. Those people then lose credit and the cycle continues in its downward spiral.

So my question is when did we become credit dependent? Why is it that no one pays cash for a big ticket item anymore? I mean in all seriousness, why doesn’t anyone save up to buy a car anymore?

The theory as I see it is, in order to wrestle with diminished spending power we have given the country the ability to pretend they still have spending power. What does that solve? Well, in the short term, it causes a rise in demand. That means that manufacturers need to increase production, meaning more jobs. The problem is that the demand is real in terms of product, but false in terms of profit. The manufacturer is being paid with IOU’s granted by banks. The long term is that when an individual exceeds his limitations, and that bank has to take back that product, someone is left holding the ball. So what happens when a large percentage of the population exceeds their limitations? I think we all know how that turns out, I mean we’ve been living it for a little over a year now.

At this point it seems that this cycle has pushed us to an excessive point of production, on a rather feeble amount of true buying power. And when the bubble burst, the profits all turned into dust and the company had exceeded its budget.

So now what? No one wants to be left with the bad debtor.

What it comes down to is that when buying power is down, production should also go down, not up, as the credit glitch has allowed. What I mean is that supply and demand should be based on actual demand, and not just demand.

The big question is how do we fix it? No clue.

I’m open to suggestions and discussions.

Drop a comment and lets address it.