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Throughout history, people have demanded credit. That is, one or more individuals find themselves with a venture they wish to undertake without having sufficient resources at hand to pursue said venture. Law has vacillated on the appropriate amount of interest, and oftentimes religious law has come into play when defining appropriate conduct regarding interest (including from whom you may require interest and if you’re allowed to at all).

Generally speaking, the interest rate is part of the contract between the borrower and the lender. The lender agrees to lend the borrower a certain amount of money provided the borrower pay back an additional fee, usually defined by an interest rate. If the buyer defaults on the loan, the lender may take steps to have his money returned to him (in this way, theft of money might be considered a loan with a zero-length term; no interest comes into play, but you can certainly take legal recourse to get your money returned to you). Legally speaking, a lender can sue you for the defaulted sum plus interest plus court costs, though settlements are commonplace.

There are laws that prohibit interest rates above a certain amount. The term “usury” has meant different things over time; in most Western nations, it refers to overly high interest rates, generally the ones prohibited by law. I believe that the maximum interest rate on credit cards (I don’t know about loans) is around 24%. The United States has different criteria for interest rates and lending, depending on the locality and the scope of the lending.

So, why do I bother writing about this?

Credit, as is everything else, is subject to supply and demand. In this case, the commodity is money, and the price refers to the interest rate and repayment terms. “Credit risk” is something that is evaluated on a case-by-case basis. However, generally speaking, those with a low credit risk are able to obtain more favorable terms of credit than those who have higher credit risk. Credit risk is generally determined by credit history. It may or may not have anything to do with your current ability to pay credit fees, depending on the type of credit you’re asking for.

Generally speaking, if the overall population is paying their balances on time, a credit company is able to keep prices low–that is, offer low interest rates and favorable payoff terms. However, if the population is not paying their balances, a credit company must raise their prices in order to cover costs of default. If this seems unfair, remember that, as a borrower, you are the one borrowing money, and you’re borrowing it on their terms.

Interest rate caps put an upper limit on supply. Beyond that point, a credit company cannot legally lend you money if you’re considered a high credit risk.

There may be many reasons why one might need to borrow money, but I’m afraid that most people do not do it out of necessity. This is something we hear a lot about on the news, especially things like consumer debt being out of control and the like.

We also hear a lot about deficit spending when it comes to the government. However, deficit spending as a general term refers to spending more money than you’re currently making. In many circumstances, we do this because there’s an obvious payoff involved, such as owning a car or a house. But all too often, we compound that with additional credit card debt (and I’m no exception).

It’s difficult to blame the government for egregious deficit spending when we ourselves engage in it.

It is the case that individuals make up the government, so the actions of the government are no more than the accumulated actions of many individuals. In order to change the attitude in government, we must first change the attitude in ourselves.

This is no easy task. If we are addicted to anything regarding consumption, we are addicted to spending. We are addicted to wanting more, more, more. We can hardly help walking into a store and buying something that we want just because we want it. “Delayed gratification” is just a term in the dictionary for us.

But, you may ask, what is the problem with deficit spending in government? Does it really matter if the government spends more than it takes in?

I think it does matter. First, the way the government obtains credit is by issuing bonds. These are basically slips of paper that tell the holder that they may request the value of the bond from the government at any time, and the government will pay it.

Currently, the national debt is over eight trillion dollars. That is the numeral eight followed by twelve zeroes. Twelve. $8,000,000,000,000.

The United States takes in approximately $2.1 trillion in revenue. That means that unless the US government has $8 trillion sitting around, it would take the US government four years to pay all of the bonds and debt that has accumulated, not counting interest, if it did nothing but pay back bonds (that means no services whatsoever–no medicare, no defense, no meetings of Congress–nothing)!

Worth noting is that our GDP (one way to measure the value of output) is over $12 trillion. That means that the government takes in about 16% of what the country produces in terms of cash, but is unable to prevent itself from overspending.

My financial situation certainly isn’t great, but at least my level of debt isn’t four times my income (at least, not until I purchase a house).

Now, as I mentioned earlier, some debt is OK. Occasionally, we will enter into a venture that puts us in “over our head” because it is worth it to us for some reason. However, we still have to pay that debt off. It is possible to not enter into that kind of debt, but it takes a lot of hard work. Basically, going into debt is easier than the alternative.

Our government should exercise fiscal responsibility. However, to do this, the people must also exercise fiscal responsibility. This extends beyond making sure you pay off your credit cards: you should make sure that you can provide for your own retirement either by working or saving up over a long period of time. Part of this is a risk–you don’t want to save too little, but you don’t really want to save too much. Many people continue working into retirement, and technology will only continue to make that increasingly possible.

Even if the government is able to make the adjustments to benefits to keep Social Security afloat, keep in mind that it was never intended to be the only source of income in your twilight years. It was based on an ultimately false theory that Big Government, Big Business, and Big Labor would continue to exist in order to provide a three-part pension for the retired (very few of which actually lived past the retirement age at the time).

I’m not going to discuss what it is that the government should or should not spend its money on. I tend to think that the government has far too much to say about how we currently run our lives and attempts to make us dependent, so I would most likely cut services, lift regulations, cut taxes, and allow the creation of competing legislative providers. At least then, Presidential elections would not be filled with idiots claiming that they can “create jobs” and “stimulate the economy.”

We would be living in a society that would have high levels of inequality, but it is inaccurate to say that inequality is a bad thing. It is merely a fact of life–some people will invariably be better than others at any given task. Punishing success does not bring us to a better place–it brings us all down to the same miserable place.

OK, done preaching for now.

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1 Comment »

Comment by kaishaku

2006-05-06 22:52:23

Mmmm, I'm all about the delayed gratification. My five digit bank balance attests to this.

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