THE ROOT CAUSE OF THE CREDIT CRISIS
"Overconsumption fueled with hyperleverage is akin to walking the tightrope (while inebriated) without a net below." -- Douglas Castle
Dear Friends:
The entire world can use a good object lesson from the United States about what actually creates a credit crisis. It is not simply the excesses of financial institutions, a lack of regulatory oversight, the government's propensity to tax or to print paper currency.
A credit crisis occurs because consumers, businesses and governments have become addicted to credit in the same manner as motorists have become addicted to fossil fuels. The United States economy has been systematically running on credit (the use of a third party's money for some length of time, with an obligation to repay on the part of the borrower) for so long that all parties involved have completely forgotten some of the fundamentals of a sound economy:
1. Save some of your money for contingencies;
2. Keep some equity on your balance sheet;
3. Invest money at a rate which is dependably higher than the cost of borrowing;
4. Do not speculate with borrowed funds;
5. Always maintain a budget, and constantly monitor your performance against it;
6. You must produce (i.e., add value) in order to become wealthier;
7. Re-invest some of your profits in future growth -- don't bleed your organization dry so that you strip it of all protection in the event of a temporary economic downturn.
Every economic phenomenon has its roots in behavioral psychology. It is our thinking and the actions we take which are attributable to it that get us into economic problems. The popular cultural trappings of material wealth are illusory.
When a family has two leased high-line cars, a palatial home which is worth less than the mortgage against it, and is using one line of credit to refinance another (i.e., spending more time and effort refinancing than eliminating debt), to all appearances they may look wealthy. But beneath this veneer of "Hollywood wealth" lies the worrisome knowledge that the family's total income is $1.00 per month in excess of its fixed debt obligations, and that there aren't any savings...overconsumption fueled with hyperleverage is akin to walking the tightrope (while inebriated) without a net below.
You can read more about this phenomenon by clicking on:
http://reasonoutofrandomness.spaces.live.com/blog/cns!CE3AA43D3EBF46F5!176.entry
BRIEF COMMENTARY:
U.S. SOCIETY'S REAL CREDIT PROBLEMS DO NOT CONCERN GROWING CONSUMER OBSESSIONS IN THE ZERO SUM GAME OF KEEPING A "GOOD" CREDIT SCORE -- THIS PREOCCUPATION IS MERELY SYMPTOMATIC OF A SOCIETY THAT HAS GOTTEN LOST IN A PATTERN OF: 1) USING CREDIT TO FACILITATE NON-INCOME-PRODUCING PURCHASES AND PAYMENTS WITHOUT A PLAN FOR REPAYMENT; 2) USING CREDIT TO "BUY" AN INDEFINITE EXTENSION OF TIME [THE "BRIDGE TO NOWHERE" THEORY]; 3) CHRONIC CURRENT CONSUMPTION USING "OTHER PEOPLE'S MONEY"; AND 4) ACTUALLY DIS-SAVING IN LIEU OF SAVING OR INVESTING FOR THE FUTURE. -- Douglas Castle
Faithfully,
DC
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