There are many things in this world that I do not understand. Like the computer I am using. I have no idea how its made, no clue as to why certain circuits connected to each other make something happen. I don’t really care all that much though, as long as I know how to use it, and it does its job. There are some things though, that as much as I try to understand them, it just doesn’t make any sense to me.
Consumer Credit, and why its a Good Thing: Investopedia defines consumer credit as a debt (credit card, line of credit, and other loans) that a person incurs for the purpose of purchasing a good or service. It includes vehicle, student and other recreation loans but excludes real estate and margin for investment accounts. So basically people taking on debt to purchase stuff they want and need.
Consumer Credit is one of the major economic factors in the stock market. It is reported by the fed once a month. They have a prior number, expected number (which is the average of analysts) and the actual number. The stock market loves when this number is higher than both the prior and expected numbers because it means the that population is increasing borrowing, which means that they are purchasing goods and services and potentially increasing companies earnings.
I get that increased spending is a major factor in helping the economy recover, that makes sense to me. What I don’t understand is why going into debt to do so is a good thing. Why is it that the government, companies and investors think that by individuals going deeper in debt is the greatest thing in the world. They see that consumers are taking on debt, which means consumers are more confident that they can pay back the money borrowed.
Here is my thinking of what the government thinks of consumer credit. Person A takes out a loan from the bank B, to buy a good or service from company C. Person A goes into debt by purchasing goods/service from company C and is taxed on that good/service so the gov makes money from taxes paid by person A. Person A takes out a loan with interest from bank B, which increases bank B’s earnings. Bank B pays taxes on those earnings, and the gov makes money. The goods/services purchased from company C are also taxed, and the gov also makes money on this. Everybody makes money, except for the consumer, but they do receive the end product.
I am currently one that these people seem to love. We took on debt to purchase our camper, our house, and in the past our vehicles. I sometimes think that we should have saved more and took on less debt. I don’t regret buying these things, just that we didn’t pay cash for them. Obviously many people take on debt to purchase their homes, saving enough cash to pay for one outright would take a while.
So why is increased consumer credit considered a good thing? Why can’t the government come up with a different economic indicator? They could still use an indicator that tracks how much consumers are spending, just not from incurring debt. Look at how much debt our country has. It’s going to be harder than heck to pay back. Shouldn’t we consider what is happening to Greece and change our spending habits? How much does the economy really grow if people are going into debt to spend?