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The modern economy needs loans in order to operate. Being in debt is a fact of life for most businesses. Quite frankly when an analyst sees a company that has no debt and a lot of cash on hand, they raise their eyebrows since it can be a sign that the business is not using its resources effectively.
We’ve moved beyond this stage though to the point where personal loans have become a part of many households. In the Western world. While there’s nothing wrong with that on the surface, an economy that relies on people carrying significant personal debt becomes a fragile house of cards. We are seeing one such economy in the US right now. The problem is that ultimately people reach a point where they can no longer borrow any more.
That situation has been accelerated due to lower housing prices. The drop in prices, combined with significant levels of defaults on risky loans has created a scenario where individuals and families can no longer borrow against the equity in their home. It’s no longer as liquid an asset as it once was. When banks give out things like secured loans, they need assets that can be turned over into cash quickly in the event that you can’t pay. While selling a house was as easy as falling off a log a couple of years ago, it’s now an arduous task that offers no guarantee of bringing in an offer that matches the value of the home.
It will be interesting to see how global economies absorb the shock that’s likely to hit the US economy. I have no crystal ball, so it’s hard to tell. We may all get dragged down with them or we might be able to sustain local economies as we find new trading partners. Only time will tell.
CBR // Dec 3, 2007 at 12:24 am
Personal finance to one side I think the west is in for a very bumpy ride, I expect energy prices will continue to climb as China and India consume more and more. High energy prices will force prices upwards, high inflation will mean higher interest rates and so the problem will compound.
Tony Warne // Dec 3, 2007 at 5:17 pm
I think that Australia is in for a very rude shock.
New Labour Govt.
Rising Oil Prices & Inflation
Domestic Loans Market under preassure
I think that we are in trouble.
Marc // Dec 4, 2007 at 10:53 am
CBR: The problem will compound for the poor… The rich will enjoy the high interest rates.
Tony: We have our own issues here in Canada. While we are a net exporter of oil, much of it comes from one province which will lead to even more bickering and in-fighting as the price per barrel increases.
CBR // Dec 4, 2007 at 8:30 pm
Tony I agree with you 100% – The Australian people made a big mistake. The other factors can’t be ignored either, we are in for hard times.
economics // Dec 5, 2007 at 10:16 am
We have our own issues here in China, too. With the rapid growth of economy, all kinds of social problems keep loosing out, many just stay unsolved or even aggravated so that we can keep the unparalleled superficial economic development.
Who knows what would happen in 10 years, or in 20 years.
Marc // Dec 5, 2007 at 2:29 pm
economics: From an outside observer’s perspective, China’s 600 pound gorilla is the environment. From what we see here on the outside, Beijing air quality is in a state that is killing its population. As bad as that is sociologically, it’s not going to be good economically either.
Utube // Dec 6, 2007 at 4:55 am
I just don’t like loans. they always keep me in pressure. good post.
Sock Yee // Dec 7, 2007 at 8:53 am
Sometimes we just don’t have any other choice but to take loans. Some basic necessity like a roof above our head cannot be avoided. I just took out a loan last year for my home. However, I do scout around choosing the best one and getting good advice from friends as well.
Marc // Dec 7, 2007 at 9:41 am
Utube: If you can avoid loans altogether, that’s great. Not everyone is that lucky though
Sock Yee: Home loans are usually a relatively safe bet since the asset appreciates instead of depreciating like a car.
Cheap Web Hosting // Dec 7, 2007 at 11:57 am
I think anyone can avoid loans if you don’t want to enter into a contract with the bank and accept a lower standard of living.
@ economics
I think the biggest problem in China is that it doesn’t protect the property rights of its own population. If it wants to move forward and avoid social unrest the government needs to honor personal property rights.
Marc // Dec 11, 2007 at 9:40 pm
A lower standard of living is the key. Most people get in trouble when they try to exceed your standards of living.
loans // Dec 16, 2007 at 11:42 pm
The one thing to watch out for is payday loans. I heard that some local politicians were considering banning the practice in the area to do some of the tactics involved. The real solution is that people need to read the fine print before taking any loan.
Marc // Dec 17, 2007 at 3:46 pm
Payday loans are poison indeed. Even if they weren’t as predatory as they are, the concept itself is only a good idea in very limited circumstances.