Like most of you were likely doing on your Saturday afternoon, I was cruising through some high-minded social philosophy reading when a particular concept struck me as noteworthy. It had to do with the concept of “Credit”. Henry Hazlitt says in his tome, Economics In One Lesson (pg. 28), “All credit is debt”. Now, I doubt this line is particularly exclusive to Mr. Hazlitt (though it could be), but viewing the concept of credit from that perspective must remind you: Credit isn’t cash. Think about what a store clerk may ask you when it’s time to check out: “Will that be cash, or credit?” Though either will still purchase you that new G.I. Joe you’ve been eyeing, they are clearly different concepts.
What is “Credit”, but a representation of someone’s ability to pay back a debt? Hazlitt explains further (pg. 31):
“Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form.”
Now, to further put this in context, think of the phenomenon all, or at least a good majority of us, have experienced, or at least have heard about. The minute you begin your inaugural perusal through your college campus during the first days of the semester, through the throngs of people who aren’t yet disenchanted with the idea of showing up to 8 o’clock class, there are these fun little booths with people handing out free t-shirts, gift cards, promotional cd’s, stickers; anything and everything to get you to their booth to do what?: SIGN YOU UP FOR YOUR FIRST CREDIT CARD!!
I’m using credit cards here as an example because I think most would agree they are the most iniquitous of debt instruments available today to the general public; they’re highly relevant. College students (freshmen in particular) are so yearning to expand their horizons of freedom and “fit in”, that they will readily put themselves into harm’s contractual way. But most college freshmen’s thoughts on the term “Credit” are nowhere near realistic. In fact, to most people the term “Credit” more readily translates into another term, “Purchasing Power”. While credit certainly does increase an individual’s purchasing power through the use of financial leverage, what most people ignore is that it is effectively a mortgage on your future earning power to obtain today what you otherwise had no money to afford. Again, CREDIT ISN’T CASH. You still have to “Pay the Piper”, as they say.
America, whether unashamedly, unwittingly, or uncaringly, today is a debt culture mainly due to our misconception of “Credit”; we choose to see it more as “What can I have today?” rather than “What have I forfeited tomorrow?” While some manner of inflation may be avoided by early purchase of goods, ultimately the interest costs associated with borrowing outweigh inflation several times over, and furthermore put more of a damper on future purchasing power as more of a persons money is spoken for by the interest on goods they already own.
Now, in no way do I want to suggest that credit should be avoided at all cost. Credit, unlike some of our current members of Congress, is not the Devil. However, it should be understood clearly, and used wisely.
Little Tommy Jefferson in all his would-be erudition is not immune to the follies of credit -misunderstood. While I revel in the good decisions I’ve made, I am not without my fair share of lament for those I’ve screwed up royally. Nonetheless, perceptions can and do change. Let’s hope our collective perceptions of debt and financial savvy change soon… or we’re all gonna be kickin’ it like homeys in international debtors prison.
What is “Credit”, but a representation of someone’s ability to pay back a debt? Hazlitt explains further (pg. 31):
“Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form.”
Now, to further put this in context, think of the phenomenon all, or at least a good majority of us, have experienced, or at least have heard about. The minute you begin your inaugural perusal through your college campus during the first days of the semester, through the throngs of people who aren’t yet disenchanted with the idea of showing up to 8 o’clock class, there are these fun little booths with people handing out free t-shirts, gift cards, promotional cd’s, stickers; anything and everything to get you to their booth to do what?: SIGN YOU UP FOR YOUR FIRST CREDIT CARD!!
I’m using credit cards here as an example because I think most would agree they are the most iniquitous of debt instruments available today to the general public; they’re highly relevant. College students (freshmen in particular) are so yearning to expand their horizons of freedom and “fit in”, that they will readily put themselves into harm’s contractual way. But most college freshmen’s thoughts on the term “Credit” are nowhere near realistic. In fact, to most people the term “Credit” more readily translates into another term, “Purchasing Power”. While credit certainly does increase an individual’s purchasing power through the use of financial leverage, what most people ignore is that it is effectively a mortgage on your future earning power to obtain today what you otherwise had no money to afford. Again, CREDIT ISN’T CASH. You still have to “Pay the Piper”, as they say.
America, whether unashamedly, unwittingly, or uncaringly, today is a debt culture mainly due to our misconception of “Credit”; we choose to see it more as “What can I have today?” rather than “What have I forfeited tomorrow?” While some manner of inflation may be avoided by early purchase of goods, ultimately the interest costs associated with borrowing outweigh inflation several times over, and furthermore put more of a damper on future purchasing power as more of a persons money is spoken for by the interest on goods they already own.
Now, in no way do I want to suggest that credit should be avoided at all cost. Credit, unlike some of our current members of Congress, is not the Devil. However, it should be understood clearly, and used wisely.
Little Tommy Jefferson in all his would-be erudition is not immune to the follies of credit -misunderstood. While I revel in the good decisions I’ve made, I am not without my fair share of lament for those I’ve screwed up royally. Nonetheless, perceptions can and do change. Let’s hope our collective perceptions of debt and financial savvy change soon… or we’re all gonna be kickin’ it like homeys in international debtors prison.
2 comments:
Credit and the availability thereof, as we know it now, is one of the greatest social and financial manipulations in modern history. The very essence of your topic and the fact that you spell out the ease with which creditors are able to indoctrinate our youth into this false pretense that instant gratification is paramount to responsibility. In all honesty the preying on our youth with this vigor is not much different than Joe Camel. Extreme as the analogy may be, the fact is that these companies willingly set these kids up to fail. Furthermore, the detriment that befalls the majority of these kids is reckless and borderline negligent. The fact is, this issue can be expounded into a much greater socio-political and philosophical conversation, for which there is not enough space nor whiskey provided to discuss here. However to summarize, suffice it to say that we as a society have come to neglect personal responsibility, and have turned to a reckless drunken mob, who are only concerned with ourselves. I personally choose not to participate in the current economic downturn, and the "credit crunch" as it may be, because my experience and long conversations with my grandfather have taught me that cash is king and if I can't afford it now, I didn't need it in the first place.
Little Tommy,
I would love to see a follow up post regarding the bill passed this week regulating the credit card market. I heard a report that it would restrict individuals from obtaining credit cards until they are 21. There you have it. Now the right of passage will be to go get drunk and put it all on your new credit card on your 21st birthday.
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