Coming Credit Collapse

“There may very well be an unprecedented wave of bank mergers and consolidations as weaker fish seek shelter, and there almost certainly will be some failures. ” (Bonin, 1998, 14) Why all this economic instability? There are various factors, of course. But of all the answers, one stands out above the others. It is repeated by economists over and over again as being a main cause of the problems: too much debt! For decades now, people, businesses and governments have been living far beyond their incomes. They have been borrowing more and more money to finance their affairs.

Their desires have grown faster than their ability to pay. To make up the difference they have resorted to ever-increasing amounts of debt. But sooner or later the time comes for debts to be paid off. If income does not raise enough, debts cannot be paid. And if more money cannot be borrowed because of becoming a bad credit risk, then failure or bankruptcy follows. That is what is taking place now to a growing number of individuals, businesses, and even banks. In the book The Coming Credit Collapse, investment adviser Alexander Paris writes:

“There does indeed exist a single fundamental cause of all the financial ills. They may all be traced to a long trend of excessive credit [debt] growth, which is rapidly approaching its final phase. . . . (Buch, 2000, 31) “Over the entire postwar period [since 1945], the amount of credit outstanding has grown at a rate that, on the average, has consistently been two to three times faster than the growth in the nation’s ability to produce goods and services. Moreover, the rate has been accelerating in recent years. . . .(Buch, 2000, 32)

“This trend in credit has resulted in a growth in demand that has been highly artificial and, through its primary and secondary effects, has been responsible for most of the economic and financial problems facing the investor today. ” (Buch, 2000, 33) Business Week also singled out this basic cause, saying: “The United States, like the world around it, is in sad shape today. Having borrowed too much in the expectation of perpetual plenty, Americans are desperate for answers to questions for which there are no pat answers. . . .(Buch, 2000, 33) “The world’s great economies were running out of control long before [the huge price rise in oil] .

. . and all that the oil situation has done is to hasten an inevitable day of reckoning. ” (Buch, 2000, 34) The extent of debt has become truly staggering. During 1974 the debt in the United States reached over two and a half trillion dollars! That is more than the total value of goods and services produced in an entire year. Of that debt, corporations owe about one trillion dollars, the federal government about $500 billion, state and local governments about $200 billion, consumers about $200 billion, and the mortgage debt was about $600 billion (Drakos, 2002, 15).

Now corporate debt amounts to more than fifteen times after-tax profits, about double what it was in 1955. Household debt is about 93 percent of income left over after other basic expenses are paid, a huge increase in recent years. And the mount of money available in the entire country is only a small fraction of the total debt (Drakos, 2002, 18). The world’s debt is estimated to be over $10 trillion. It is not likely that it will ever be paid back. The debt psychology has permeated every corner of the economy.

The Western world is so geared to debt that living within current income would wreck it as easily as would continued inflation. Why so? If borrowing were cut back to pay current bills, people would not buy as much, nor would businesses or governments (Drakos, 2002, 21). Production would have to be cut back drastically. Masses of people would be thrown out of work. The industrial way of life, which has concentrated so many people off the land and into cities, could not absorb such shocks. The “prosperity” of the Western nations has been built on borrowed money. It has not been genuine.

Now the bills are coming due and cannot be paid. And that is an aspect of the problem that frightens leaders. So many people, businesses and governments are near bankruptcy that even a small number of them failing could start a chain reaction that would bring the Western world’s economy to its knees. The New York Times observed: “The impact of a staggering increase in oil prices on top of already soaring inflation and rising deficits in payments abroad has sent governments reeling everywhere. ” With debt at such an all-time high, major defaults could wreck the banking system (Buch, 2000, 21) .

Business Week noted that “corporations are sick—and they are sick largely as a result of their overdependence on debt. ” Consumers are also “sick,” as are most governments—due to debt. Every bank lives with the knowledge that if a few major customers that have borrowed money cannot pay it back, the bank can be in deep trouble (Buch, 2000, 24). If, due to economic difficulties, many businesses and individuals default on their payments, there is no way that any government can make up the difference, since most governments are also deeply in debt, much of it owed to banks! (Buch, 2000, 25) For instance, during 1974 a U. S.

federal agency, the FDIC (Federal Deposit Insurance Corporation) insured individual bank deposits up to $20,000, then later in the year raised this to $40,000. But this agency had only about $5 1? 2 billion in its reserve, while the deposits it “insured” were nearly $470 billion! Obviously, the closing of even a small number of banks would bankrupt this insurance agency. Yet banks themselves are much to blame for their present condition (Fries, 2003, 14). Investment adviser Alexander Paris states: “The banking system has been a willing partner in the long postwar financial deterioration that has occurred in the United States and the world.

” He observes that the financial health of the banking system “by all measures, has deteriorated steadily throughout the entire postwar period, and all former limits of propriety have been far exceeded in the pursuit of profit maximization. ” (La Porta, 2002, 13) The situation that the banks are dealing with right now could be noted to have a strong impact on the development procedures of the different countries around the world especially that of the situations on the economic standing of the developing countries. What are these notable impacts and how are they being dealt with by the economic officers of the different nations today?