The Folly of Persistent borrowing
The United States Federal Reserve, sometime last month, ascertained what a larger number of economists, suspected; for the first time in 5 years, the decline of household debts has come to a stop. As a matter of fact, the debt has not levelled off but instead, has begun to rise again. Chaudhuri and Shah, using graphs, showed the household debt in the US has risen by $241 billion which was an increase of 2.1 percent to the 4th quarter of last year (p.1). This followed a small increase in the figures of the third quarter. However, unlike in the case of auto loans, credit card balances, and mortgages, student debt did not drop at all. Rather, it swiftly approached the $ 1.2 trillion. Some economists have already come to the conclusion the debt overhang from 2008 financial crisis has already been resolved. As such, they believe that now, it is absolutely safe to borrow. Some of these economists are even encouraging borrowing as it is mandatory for GDP driven growth. On the other hand, taking into consideration the aggregate debt is still at a high $ 11.5 trillion, the conclusions and analysis of the economists must be flawed. Further, attempting to drive the GDP through by borrowing is a recipe for yet another economic collapse.
Taking into consideration exorbitant numbers of household’s debt, majority of people will think they can never be fully paid during their lifetime. However, this should not be so. Andrew Ross, a modern economist has coined the term creditocracy to describe the type of society we live in. The concept of creditocracy crops from the fact dents are not supposed to be repaid in full (McLemee 1). This therefore, explains why issuers of credit cards do not want clients to clear out the balance they have every month. In the industry of credit card, clients who make payments diligently every month are looked upon as deadbeats. The industry prefers clients who are unable to make ends up but they are somehow able to make the bare monthly payments. Additionally, they pay late penalties and fees as such, ensuring the banks enjoy stable revenue flow at all times. In the banking circles these kind of clients are known as revolvers. Creditors’ profits are heavily reliant on maintaining one debt throughout a lifetime and even after our death (in the instance of student debtors who die before paying less than average of their lifetime debt service).
For the last 5 years, the United States household income has either stayed stagnant or fallen. As such, the increase in means of borrowing that many borrowers need fresh credit to service the existing loans. However, acquiring new loans in order to repay old loans makes little economic sense. The attempt to make everyone a lifelong revolver is counterproductive as the state cannot be sustained especially in the long run. The move will make everyone and the US fall into a major debt trap. During the 1970s and 1980s, many developing nations fell into this kind of trap after they became over reliant on International Monetary Fund. To date, all of them failed to meet debt obligations. This significantly hampered their growth. Some have even simply refused to honor debts as they do not have the capacity to service them.
A similar case can arise in the United States households if they continue to receive encouragement to borrow to the point they are unable to meet their payment obligations. Now, picture a scenarios where majority of people have to get loans in order to buy essential goods like education and healthcare. When costs of these utilities are to be debt financed, we will have antisocial debts in the event they do not get repaid. This will then threaten the democratic foundation of the country.
The greatest strife, during the industrial era is going to be related to amount of wages. However, it seems that disputes over debt will carry on been on the frontline of conflict in years to come. For a large percentage of people, debts are a representation of the future though their creditors lay claim way in advance. In such cases, each new surrender of an important part of our debts to debt financing will consume the fruits of the labor we are yet to deliver, in the state of reward we are yet to earn. Put bluntly, this explains the belief majority of households debts are camouflaged forms of wage theft (National Consumer League 1).
Owing to fraud and deceit practiced by banks, are we supposed to carry on by rewarding them especially considering the possibility they cannot desist from these practices in the future? Major Banks have become bigger than they were initially before financial crash. Their levels of profits in the last couple of years have soared. As such, they have mastered the crucial dodgy financial derivatives. They have as well accrued colossal debts as they have surety that if these loans end up as sour, they will get assistance from taxpayers. If Americans continue to be deceived into borrowing, it is not possible to rule out another meltdown. As such, it makes moral and economic sense to refuse some obligations to creditors. It is safer instead to encourage people so they can live within their means instead of borrowing in order to buy basic social goods.
McLemee, Scott. America’s “creditocracy”. Socialist Worker, 6 February 2014. Web. 10 Mar. 2014. <http://socialistworker.org/2014/02/06/americas-creditocracy>
National Consumer League. “Wage Theft: Six common methods.” The NCL, n.d. Web. 20 Mar. 2014. <http://www.nclnet.org/worker-rights/148-wage-theft/525-wage-theft-six-common-methods>
Shah, Neil and Saabira Chaudhuri. “Americans Ramp up Borrowing.” Wall Street Journal, 21 February 2014. Web. 10 Mar. 2014. <http://online.wsj.com/news/articles/SB10001424052702303945704579390924287626780>