Practical Economics: Credit

We were born to a beautiful country but a country with limitations. In this article I want to discuss my concerns about the national economy and how we as citizens can practice responsible economics to help ourselves and our society in general. I would like to begin by paying my respects to Ray Dalio, a man whose simplicity and rather sublime understanding of human behaviour and the markets has moved me profoundly. My topic of discussion today is credit. Credit from a technical standpoint is the concept of taking a lesser value today with the legal obligation of returning a higher value to the lender in the future sometimes with a clear definite incentive of profit in the process. Very technical, very slick but from a more philosophical point of view- credit is simply confidence. Confidence that comes from calculations, meticulous thinking and mitigated risks.

Credit is really important because if it weren’t for credit the only determinant for economic growth would be increased productivity. Economy grows when people’s demand for consumption grows along with the production of objects for consumption. Very simply put it is the volume of transactions- of goods, services credit and cash changing hands for billions of times that determines how comfortable people are. But I have to warn that I feel that it is not healthy to be excessively desirous and no party lasts forever. However for a country like ours we need growth just so as to eradicate poverty and also because economic prosperity has been known to largely lessen human hardships. So we are looking for growth that reduces pain but not that blows out to become something of a full fledged consumption frenzy. I might as well add that there’s a huge role that personal discipline plays in achieving healthy and sustainable growth.

Credit is important because productivity alone is not going to get us anywhere anytime soon when it comes to dealing with economic limitations. Credit is like a blessing and a curse- like a medication that can work both ways. I feel credit is justifiable when the borrower is certain and optimistic about the reason he is borrowing for example to create jobs, to help people live better- for healthy prosperity. Credit fails when people start borrowing for consumption or when they are driven to fulfil unrealistic ambitions. I find it quite disturbing when governments fail to acknowledge the demise of an economic boom and instead encourage people to borrow to consume justso as to avoid economic slowdown. This is happening in many economies the world over. Sometimes it is only reasonable to be willing to face the music on time.

In a nutshell be cautious with credit. You can either make it work for you or against you.