Saturday, June 1, 2013

The use of credit gives us a sugar high. The following funk is the debt we pay for that high. How come we understand that with our physical health, but not our financial health?

My cyber friend over at The New Arthurian Economics has a blog posting that is deceptively short and may seem obvious, but I don't think people in general have a real appreciation for the distinction between "Credit" and "Debt" as it applies to their lives.
Debt is not good for growth. Credit use is good for growth. Debt is what remains after the benefit of credit use has passed.
Debt is bad for growth. Credit use is good for growth, and debt is bad. Yin and yang, shadow and light.
You go to the bank, borrow some money, and buy yourself something nice. That's credit use. It's good for you, and it's good for the economy.
A few weeks later, your first payment comes due. That's debt. It's bad for you, and bad for the economy.

I want to discuss this in class.  Read it again.  Then read the second sentence again and think hard about it, especially the significance of the words "benefit of credit use" in context of the sentence and the paragraph.

Let me give one example of what this means to me.  I would like you to come up with an example or two of your own and share.

I have $5.00 cash in my pocket and I am hungry.  I  can buy a hamburger, fries and a drink at McDonalds for that $5.00.  I pay cash, I eat, I am done.  Or, I could go to Chillis and buy a hamburger, fries and a drink but it will cost me $10.00 (gotta leave a tip).

Assume I pay $5.00 cash that I have in my pocket and put the remaining $5.00 on my credit card. My belly is full either way but in one case I have derived the short term benefit of eating at Chillis ("Nice Atmosphere AND the waiter was SOOOO funny!!")

Four weeks later I get the bill from my credit card company for the $5.00.  I have $5.00 (maybe) to pay the bill, but that means I can't spend $5.00 on something else at this time.  And I am hungry again to boot!!

If I had paid cash in the first instance (foregone the Chillis experience) I would be fed and have no credit card payment in 4 weeks.  I would likely have another $5.00 at that time and I could buy another meal.

In which case am I better off? The economy as a whole?

I think this is what Art is referring to.

If I ever meet Art I will buy him lunch---probably at McDonalds.  I don't like debt.   :)

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