Shamlan's Blog

Capitalist economic theory is based on the assumption that there is a scarcity of resources, be these land, buildings, homes, money and such. Because of the scarcity, there is competition for these resources, and this competition leads to a capitalist economic concept, that of Supply & Demand. In this concept, the more Demand there is for a resource, the more a provider of these resources can charge for them. As the price of the resource climbs, more people will then want to Supply that resource, decreasing the scarcity of the resource, which then ultimately, slows the rise of, or even decreases, the price. Then, as the price of the resource rises, fewer people can afford it, thus reducing demand for the resource, which also has the effect of decreasing the price. Eventually, in theory, the price of the resource will find equilibrium, where it is such that there is sufficient demand for the resource at that price, and sufficient willingness of suppliers to supply at that price. An example which most people are aware of is house prices, hence we have “buyer’s” markets, where there is less demand for houses than supply, hence price rise slows as providers of houses compete for buyers, and conversely, “seller’s” markets, where there is less supply of houses than are being demanded, hence prices rise as buyers compete for houses, hence causing the prices to rise. This theory can be applied to everything a household consumes, from houses to hosiery.

In theory, prices for consumer items should therefore be determined primarily by the buying power of the household. The buying power of the household is determined primarily by the collective income of the household. Thus a household’s capacity to compete for resources is limited, in theory, to its earning power. I say “in theory”, because a household can access an additional resource to boost its spending power, based on its income. This resource is Credit. The cost of this resource is the Interest and fees the household pays for the use of the resource. Again, the greater the demand for Credit, the more the providers of Credit can charge for the supply of it, and hence the higher Interest Rates will rise, and conversely so too. As I mentioned, being able to access Credit increases the household’s buying power, hence the more resources it can demand and, as we have seen, increasing demand increases the price a provider of the resource can charge for it. Clearly, the households that can access Credit are at an advantage to those that can’t, or who can access relatively less Credit.

Credit, as a resource, has been around for centuries, but Credit as we know it came into existence following the establishment of the Bretton-Woods financial system in 1933 but, because of the two world wars, only became a mass consumer product after the end of World War II. Post WWII governments no longer needed Credit to fund their war efforts (War is very good for Credit providers!)  hence making more Credit available to the households. The availability of Credit to households had the effect of increasing the buying power of these households, thus increasing demand for resources, thus fueling price rises. It had got to the point where, because of the seemingly limitless amount of Credit available, that instead of finding price equilibrium, home prices continued to rise as more and more Credit kept getting fed into the households. This created a never-ending upward spiral in prices, taking fewer and fewer households with it. Households that couldn’t access Credit were simply left behind. That this is true can be seen in the slow down in home price increases as household Credit was limited by, first the implementation of the National Credit Act in 2007, and then the impact of the global Credit “crunch” which started in late 2008. Home prices are, when adjusted for inflation, falling, in line with Supply & Demand theory, as households’ ability to compete for homes diminishes as a result of the increased scarcity in available Credit. This leads to an unintended consequence whereby the price a home can fetch on the market is less than the amount the household owes to the provider of the Credit. That is all fine so long as the household has enough of the “money” resource to keep paying for the costs of its Credit resource. If not, the “house of cards” (excuse the pun) comes tumbling down and the household must now return the resources it bought with the Credit, or suitable other resources to the same value. But, oops, the value of the resources being returned to the provider of Credit may not be enough. And if one of the resources is the household’s Home, where are the people in the household going to sleep? Furthermore, none of the parties win in this case. Firstly, the provider of the Credit now has a home it has no use for, and cannot dispose of as there is not enough demand for the home in the market, and the household has nowhere to sleep.

This exposes the futility of “repossession” in economic times such as these. Sure, its easy for those who can still service their payments to condescendingly accuse those who can’t for “living beyond their means”, but these people would not have been living beyond their means had Credit not been made available to them firstly, and secondly, the rapacious provision of Credit by the credit providers caused home prices to rise to the point that the only way to get one was to use Credit. This is a bit like “riding a tiger’s back”. You’re safe, until you fall off, then the tiger turns on you and you get consumed!  Those people who do condescend to blame the unfortunate credit defaulter should remind themselves that this is all relative, and I’m certain they to have bought homes beyond their means, by their own definition, and are only one pay-cheque away from the same situation.

The thing that beguiles me the most however is the manner in which the American’s have gone about dealing with this problem. The original plan, marketed by Obama during his election campaign, was to “mop up toxic debt”, thus enabling the indebted household to restructure their debt payments to levels they could manage, leaving them in possession of their home, and the Credit provider still in a healthy position. This would have been a Win-Win situation for the household and the Credit provider. What has happened however, post-election, is that trillions (that’s billion billions) of dollars have been given directly to the Credit providers, who have repossessed the homes anyway. This is known as a Win-Lose! (For the latest in this see http://www.infowars.com/max-keiser-prosecute-the-bankster-crime-syndicate). This makes the words of Thomas Jefferson, penned in 1776, quite prophetic. He wrote:

“I believe that banks are more dangerous to our civil liberties than standing armies. If the American people ever allow the private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”.

Futhermore, John Adams also wrote, in the late 1700′s, that:
“All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.“
This is just as applicable to South Africa today. I wonder how many people even know where money actually comes from. If you think its the Reserve Bank I strongly suggest you Google “where money comes from”. Do it, even if you think you know!
It is clear that Credit providers are just like drug-pushers, tempting those “ignorant of the nature” of the drug into using them, thus creating a dependency on the substance such that life becomes unbearable without it. Given that it is impossible for 98% of South African household’s to buy a home for cash, because the prices have been artificially inflated due to Credit, how else does one get a home without using Credit? Renting a home serves only to fuel the problem, concentrating the ownership of homes in hands of those who are either insanely wealthy, by fair means or foul, or those who can still access credit. In addition, Supply & Demand theory pulls in again, this time increasing the level of rental prices due to increased demand for rental properties, thus leaving some households behind, again. Someone always loses, just like with drugs. The drug lord gets rich and the user gets their life destroyed! To further illustrate the point, in testimony to the recent Enquiry into Banking Charges, ABSA Bank (a provider of Credit) stated:
“Credit cards are necessary because Credit cards enable cardholders to make larger purchases than would otherwise have been the case”! (Banking Enquiry Report Pg 315)
And, the conclusion of the Enquiry Panel, on Credit cards, was

“Like a mirage, the interest-free period serves as an attraction to those credit card users who prove unable to repay timeously, and who are thereby more easily drawn into high-interest bearing debt”. (Banking Enquiry Report pg 347)
The inescapable conclusion from this is that Credit, like drugs, should be deemed a controlled substance, to the point of becoming an illegal substance. The entire economy needs a massive “reset”, to remove the artificial increase in prices brought about by Credit. This will force an immediate decrease in prices as no household will be placed at an artificial advantage through the application of Credit, thus allowing all households to compete equally for resources and thus allowing households to “live within their means”. This does not contradict Capitalism. Some will always have more than others, be it through demanding a higher salary as a result of higher intelligence or better education, or through the creation of new products through innovation, that households will demand. The difference is, that there will be no Credit providers to “push” their toxic products on unsuspecting households, enslaving them and creating a yolk and burden for the households from which it is impossible to escape.