For the past several years we have been living on a borrowed dream. When we wanted something we would just “put it on the card.” Then if at the end of the month if we did not have the money we just paid as much as we could and let the balance accumulate at 20% interest. This living on a borrowed dream included the purchase of houses, second homes, boats, clothes, appliances and in some cases even food using credit in the form of mortgages or credit card debt.
Where did the money to make these loans at 20% interest come from? Some of the money was from banks, pension funds and money market funds but I suspect a large amount of the funds were from foreign lenders such as China and the Middle East. We were borrowing from them to purchase the goods that they created. However, the money we borrowed to enjoy the good life has to be repaid and that is the problem. We all have heard of the problem of home owners owing more on their mortgages than their property is worth. Well, some homebuyers took a gamble that if the property value went up they would win and if the value went down then the bank would lose. Guess what, that is exactly what is happening now. But the loser may be you, me, foreign lenders and the Federal government.
Over 50% of our economy is based on consumer spending and probable 80% of consumer spending involves credit cards. If merchants are concerning about the lack of desire in purchasing consumer goods for the holidays just imagine what will happen when Mr. Smith decides to make a purchase and the credit card company saysâ€¦.Mr. Smith you have exceed your credit limit and your credit card is no longer valid. When this happens our system of living the borrowed dream will come to an end. Our system of rewarding borrowers and penalizing savers will come to an end. The outcome of this will mean less consumption and spending but I’m not sure this is such a terrible outcome. I believe it was Benjamin Franklin who said. “Happiness is spending less than you earn”