A tiny spin-off from the Milton Friedman thread ...
Seeing as one of the most important economic principles says don't spend more than you earn I thought it to be a good debate as to where that line goes ... what do you need to borrow money to finance and what do you save up money to buy?
How big a house do you need or to twist it around how much money can you afford to borrow ... do you plan ahead saving money to buy a new fridge, washing machine, TV, stereo etc etc or do you just use the credit card when the time comes?
Consumer Credit: The Next Crisis
article from Harvard Business Review - 2009
A furniture company offers 0% financing and no payments for a year. Consumers gladly take this free credit. Sales skyrocket. Buoyed by rising revenues, the company takes out a loan and opens a second store, expecting to pay its employees, its suppliers, and its bank with future revenues.
Unfortunately, this isn’t the only financing the company’s current and potential customers are using. Rather than pay off their credit card bills every month, more and more people are leaving balances, and those balances are growing larger. People are taking out 72-month loans to finance their new cars. They’re just starting to make payments on the home appliances they bought 12 months ago with those other buy-now-pay-later deals. They’re tapping into home-equity lines of credit to go on vacation.
As more and more of their disposable income is going to pay off their debts, new purchasing slows abruptly. Some people start defaulting on their cards altogether, turning past purchases into present bad debt.
Sales slow dramatically at the furniture store, and it closes the second store, laying off workers. This has an impact not just on the retailer but also on its suppliers and its financers, some of whom don’t survive. Other companies that do business with those unfortunate suppliers and former employees find their operations affected as well.
Scale up this scenario even a little bit, and it starts to be clear that the degree to which consumers have come to depend on easy, inexpensive credit is a far bigger threat to the economy than most people realize. Few companies are immune to the risks. Consumers are using record levels of debt to purchase goods and services, leaving the corporations selling to them greatly exposed, sometimes fatally.
But thankfully, this corporation killer can be diagnosed, analyzed, and managed. Analysis of simple ratios can help you identify the warning signs of consumer leverage exposure (CLE) and take action to forestall much of the crippling impact it could have on your company. Managers who ignore the warning signs and leave their companies vulnerable will have only themselves to blame.
What Is Consumer Leverage Exposure?
Just as a finance manager would measure corporate leverage as a ratio of debt to income, we measure consumer leverage as the ratio of total household debt to total personal disposable income. Specifically, it’s a measure of how much money American consumers have tied up in credit card debt, mortgages, home-equity loans, auto loans, and education loans compared with their ability to pay off this debt. As the exhibit “Consumers’ Mounting Debt” shows, the ratio stands at 1.30, slightly off record highs of 1.33 in the first quarter of 2008.
And for the record this is not an attack on US consumers, it's more an open question to the forum members ...
Is there really something like free credit?
How do you interpret the term free credit?
Seeing as one of the most important economic principles says don't spend more than you earn I thought it to be a good debate as to where that line goes ... what do you need to borrow money to finance and what do you save up money to buy?
^^And even those two imo must be financed with care ...Varegg wrote:
Possibly the only two exceptions ...11 Bravo wrote:
how would you buy a house or car?Varegg wrote:
don't spend more than you earn is a good economic principle and it applies to both personal and government economy ...
How big a house do you need or to twist it around how much money can you afford to borrow ... do you plan ahead saving money to buy a new fridge, washing machine, TV, stereo etc etc or do you just use the credit card when the time comes?
Consumer Credit: The Next Crisis
article from Harvard Business Review - 2009
A furniture company offers 0% financing and no payments for a year. Consumers gladly take this free credit. Sales skyrocket. Buoyed by rising revenues, the company takes out a loan and opens a second store, expecting to pay its employees, its suppliers, and its bank with future revenues.
Unfortunately, this isn’t the only financing the company’s current and potential customers are using. Rather than pay off their credit card bills every month, more and more people are leaving balances, and those balances are growing larger. People are taking out 72-month loans to finance their new cars. They’re just starting to make payments on the home appliances they bought 12 months ago with those other buy-now-pay-later deals. They’re tapping into home-equity lines of credit to go on vacation.
As more and more of their disposable income is going to pay off their debts, new purchasing slows abruptly. Some people start defaulting on their cards altogether, turning past purchases into present bad debt.
Sales slow dramatically at the furniture store, and it closes the second store, laying off workers. This has an impact not just on the retailer but also on its suppliers and its financers, some of whom don’t survive. Other companies that do business with those unfortunate suppliers and former employees find their operations affected as well.
Scale up this scenario even a little bit, and it starts to be clear that the degree to which consumers have come to depend on easy, inexpensive credit is a far bigger threat to the economy than most people realize. Few companies are immune to the risks. Consumers are using record levels of debt to purchase goods and services, leaving the corporations selling to them greatly exposed, sometimes fatally.
But thankfully, this corporation killer can be diagnosed, analyzed, and managed. Analysis of simple ratios can help you identify the warning signs of consumer leverage exposure (CLE) and take action to forestall much of the crippling impact it could have on your company. Managers who ignore the warning signs and leave their companies vulnerable will have only themselves to blame.
What Is Consumer Leverage Exposure?
Just as a finance manager would measure corporate leverage as a ratio of debt to income, we measure consumer leverage as the ratio of total household debt to total personal disposable income. Specifically, it’s a measure of how much money American consumers have tied up in credit card debt, mortgages, home-equity loans, auto loans, and education loans compared with their ability to pay off this debt. As the exhibit “Consumers’ Mounting Debt” shows, the ratio stands at 1.30, slightly off record highs of 1.33 in the first quarter of 2008.
And for the record this is not an attack on US consumers, it's more an open question to the forum members ...
Is there really something like free credit?
How do you interpret the term free credit?
Wait behind the line ..............................................................
