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kdakota630 (29.71)

Peter Schiff: Credit Card Cancer

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March 13, 2009 – Comments (4)

This week, with his pronouncement that “credit is the lifeblood of a healthy economy,” President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

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4 Comments – Post Your Own

#1) On March 13, 2009 at 5:56 PM, lquadland10 (< 20) wrote:

Chase charges 110 % a year including fees. No wonder they want to keep the cards open.

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#2) On March 13, 2009 at 6:08 PM, cbwang888 (25.56) wrote:

Credit card is the best innovation of the centry.Just swipe it on the machine and you've got what you want.

 

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#3) On March 13, 2009 at 11:10 PM, Imperial1964 (98.24) wrote:

There is some truth to both arguments, but when people in government claim that people need access to credit cards to pay their bills they are just facilitating the transfer of wealth from the poorest among us to the wealthiest.

Credit will always be a part of a healty economy.  Being a more certain of repayment, there will always be investors willing to lend businesses money in the form of credit (up to a point) at a lower cost than equity capital.  So in a health economy there will always be both supply of credit and demand for it.

I can come up with two problems with credit.  The first case is when the credit is wasted on something unproductive.  For example, if I go to the movie theater and charge the ticket, that money was used up and I have nothing left of value.  All I have now is debt.

The other problem is when credit is overused.  My company uses credit to expand, increasing my revenues and increasing my earnings.  Of course I have to service the debt, so my earnings don't increase as much as the revenues, but I remain sole proprietor of the company and did not have to dilute my ownership by selling equity.

Unfortunately, debt quickly approaches the point of diminishing returns.  The more debt my company carries the more principal I pay interest on.  Furthermore, my interest rate goes up.  So each new dollar of debt increases my earnings less and less.  Furthermore, with all this expansion I am doing I begin to run into diminishing returns there too.  Remember, not every dollar spent on growth is as profitable as the last one.

Add to that that credit is risk--that is why they are charging me interest on it.  The more debt I have the less likely I am to be able to pay it back when business gets tough.

So while unproductive debt and excessive debt can drain an economy, productive debt can help grow it because it is often "cheaper" than equity capital.


That said, I have no debt (my personal equity capital is in sufficient supply) and credit card companies are evil.

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#4) On March 20, 2009 at 12:45 AM, Bays (29.90) wrote:

 Imperial1964

 "So while unproductive debt and excessive debt can drain an economy, productive debt can help grow it because it is often "cheaper" than equity capital."

 That is a good point.  Peter Schiff does imply that though when he says:

"When not used properly credit can be like a cancer that sickens an otherwise healthy economy."

kdakota360: Always enjoy reading your Peter Schiff blogs...  I like where your heads at.  Did you watch his "Why the Meltdown Should Have Surprised No One" video?

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