Consumers Slash Borrowing at Fastest Rate in History

Economists expected consumer credit to shrink by $4 billion between June and July 2009. Their predictions missed the mark by a long shot.

Instead of $4 billion, consumer credit shrank $21.6 billion in just one month’s time, “the most on records dating to 1943,” according to this article.

Why such a drastic drop in credit?

With job losses mounting and an uncertain economy, many consumers are canceling cards and voluntarily cutting back. Plus, credit is hard to get these days. And banks and credit card companies are reducing available credit limits in an effort to reduce their exposure.

Of course, reduced credit isn’t good news for the economy because consumer spending accounts for “70% of  economic activity.” But what’s bad for the economy may actually be good for consumers.

Like a forced diet can help you lose weight, so can a forced “debt diet” force you to refrain from spending money you don’t have.

Thoughts on Our Money System

Ever since March, when Troy left a comment on my blog, I’ve been thinking about what he said. His comment was in response to my post on hyperinflation. Troy writes:

Ryan, just found your blog and am a bit confused. I believe that the scenario in some form as described in “Ushering in a New Era of Hyperinflation” will materialize. Whether it is nasty inflation or hyperinflation, we will see the value/purchasing power of our dollars decreased. It seems that you are focusing on debt reduction. A very noble and valuable exercise but probably not in this paradigm.

May I suggest an alternative approach? Keep your debt. What is the benefit of debt reduction right now? What is your current debt load preventing you from accomplishing? What opportunities are you missing because you a focused on singular goal — debt reduction. What about investing to expand your business? What about investing some portion of your debt reduction funds on acquisition of physical assests such as silver or gold… as a hedge? What about taking on debt backed property?

If inflation happens, savings become worth less and at worse worthless. If inflation is going to occur, then debt-backed properties and physical assets are the way to go. I am not suggesting one extreme or the other. Simply that debt reduction should be balanced with other strategies. The most important issues is to make sure all variable rates are FIXED. Best of luck. Keep the faith, brother.

I’ve been reading and learning about our money system for a few years now (I’m currently reading The Creature from Jekyll Island by G. Edward Griffin), and I’ve been struggling with what to do.

Because, in a way, what might seem logical in an economy with real money is illogical in an economy with fiat money.

The money I have today has more purchasing power than the money I earn tomorrow. Which means there is a strong incentive to spend that money on physical goods now — and a strong disincentive to save.

I distinctly remember when the real estate bubble was expanding in the early 2000s because Steph and I wanted to buy a home for our growing family. But it was insane. Builders were raising their prices by as much as $15,000 every couple weeks.

If you waited two weeks to make a decision, you would have to pay an extra $15,000. But who could possibly save that much money in only two weeks? Because of price inflation, waiting to buy didn’t make a whole lot of sense. (By the way, I still refused to buy.)

We may be on the verge of a similar situation, not just with real estate, but with the prices of everything. If hyperinflation takes hold, we’ll all be wishing we’d spent our money before it became totally worthless.

Assuming hyperinflation is in our future, it makes no sense at all to pay off debt right now. It actually makes more sense to take on debt, then pay it back quickly with worthless dollars.

I’ve studied the history of hyperinflationary situations, and from what I can tell, most people are able to pay off their debts quickly because the money supply is expanding so rapidly.

I know this probably sounds all weird and strange and topsy-turvy — and it is! You can’t think the same way when you’re dealing with a currency that is being devalued as much and as fast as the U.S. dollar.

All is to say, this line of thinking is influencing my decision about whether to buy a new car or not. I have one in mind, and it would make my debt go up quite a bit. But the car manufacturer is offering 0% interest on a 63-month car loan through July 31st.

Question: Do I buy the car using a 0% interest loan? Or do I go with one car for now and continue paying off debt?

Under normal circumstances, the “logical” thing to do would be to pay off debt. But in today’s circumstances, what is normally logical is illogical. And what is normally illogical becomes more logical.

Which is to say I’m leaning toward buying the new car.

Am I crazy? Leave a comment and let me know.

Instantly Debt-Free?

Certainly, the discipline of paying off large accumulated debts teaches us some things about financial responsibility and how better to handle money. And for that, I’m grateful.

In the current economy, though, millions of people are struggling. And the idea of becoming instantly debt-free would be exhilarating (and life-changing) for just about everybody.

Not only would it impact people on a deep, personal level, it would also lift the heavy burden that’s dragging the economy down. Perhaps we could recover sooner rather than later.

Here are two things I think would be beneficial:

#1 Declare a Jubilee

In the Bible, a Jubilee happened every 49 years. Anybody who was an indentured servant was allowed to go free… and all debts were erased.

Essentially, in a Jubilee year, everybody got to start over at zero.

A friend recently asked me: But isn’t that being unfair to all those people who save money or charge interest on the money they’ve loaned?

My answer: Not really.

First: Savings retain their value when there’s an honest money system. The American system is dishonest; it creates money out of thin air. As the money supply increases, each individual dollar is worth less and less.

Inflation (also called devaluation of the currency) is the hidden tax, and it penalizes savers while rewarding debtors.

Second: God’s law prohibits charging interest on loans. If we were to honor and follow God’s law, then there wouldn’t be so much debt in the first place.

It is unhealthy to build an economy on debt-funded consumption. This can only happen when interest (especially exorbitant interest) encourages money lenders to lend.

But since God’s law prohibits interest, this would never happen.

#2 Get Rid of Most Taxes (Particularly the Income Tax)

Right now, chances are you pay from 15% to 25% of your income just to pay state and federal income taxes.

Then there are a whole raft of additional taxes you pay: sales tax, gas tax, real estate tax, car registration tax, etc etc etc.

Some organizations estimate that the average American pays 40% to 55% of his/her gross income in various forms of taxes.

God’s system is much better. Rather than demanding 20% or 30% or 40% or whatever, He asks for only 10%. And that “tax” is only due on the increase of the produce of the ground and on the increase of the herds.

Basically, God wants a return on His labor.

But God doesn’t get involved in double/triple/quadruple taxation like man’s government does. When you really study the Biblical law, you’ll discover that God is much more merciful than you might have imagined him to be.

If you’re interested, you can learn more about The Law of the Tithe here.

Now, whether you believe in the God of the Bible or not, imagine how radically the U.S. would change if all debts were forgiven and we eliminated most of the onerous taxes we pay.

Can you imagine what that would do for people — their lives, their feelings, their productivity? And can you imagine what it would do for the economy?

I’m not holding my breath waiting for this to happen… I don’t think “the powers that be” would ever willingly do such a thing.

But stranger things have happened. After all, Pharaoh did let the Israelites leave Egypt.

Ushering in a New Era of Hyperinflation

This last week, “Helicopter Ben” and The Fed decided to “create” $1.2 Trillion in new money.

That is a lot of money.

Of course, I have no idea what the future holds. I can only make predictions. So let me venture a prediction here.

All the bail-out money that’s been dished out so far hasn’t really hit main street. It’s only hit Wall Street. So we really haven’t seen much inflation from bail-out money.

But this latest development — adding $1.2 Trillion to the money supply — could very well usher in a new era of hyperinflation in America.

If you study the Weimar Republic in pre-Hitler Germany… or modern-day Zimbabwe… or any other country where the government has decided to print money for any and every need…

…you’ll soon discover that hyperinflation is no walk in the park.

At first, people are able to pay off old debts with newly created money. Some are even able to pay off their mortgages within months instead of years.

Ultimately, though, people end up selling their homes to buy things like… bread.

Imagine getting a paycheck and promptly spending the entire thing on basic necessities just because waiting one day would mean losing half your purchasing power.

It sounds insane, but that’s what happens when hyperinflation is in full swing.

In the Weimar Republic, people eventually burned their money because it was cheaper to burn the paper than to buy wood.

Anyway, what you read here is speculation about the future based on The Fed’s latest move to create $1.2 Trillion out of thin air. A trillion here, a trillion there and it starts to add up to real money. Or, more accurately, fake money.

For all our sakes, I hope we don’t have to experience the ravaging effects of hyperinflation. But at this point it may be too late.

UPDATE: World Net Daily has picked up the story, today, March 22, 2009. They report that it has now been two years since The Fed stopped reporting M3 money supply figures.

Jerry Robinson, author of the new book Bankruptcy of Our Nation, says:

…the actions of the Fed can only serve at best as a temporary fix – placing a Band-Aid on a severe laceration.

“And it will only serve to delay and enlarge the scope of the impending day of reckoning for the United States,” he adds.

The Jubilee & Why We Need One

The Jubilee is a biblical concept concerning debt, and I’d like to cover it here because America — and, indeed, much of the world — is in desperate need of a Jubilee.

To understand what a Jubilee is, we first have to start with an understanding of biblical rest patterns. They are all built on the number “7” — which is the number of divine perfection.

And so every seventh day is called a Sabbath, or a day of rest. Most readers will be familiar with this concept since most religious institutions gather on they day they observe as the Sabbath.

When we take this biblical concept one step further, we see that every seventh year is called a Sabbatic Year, a year of rest.

Not only does God command a year of rest for the land during which no crops should be planted, He also commands the suspension of debts during the Sabbatic Year (Deuteronomy 15:1).

This means creditors are not supposed to collect payment on debts during the Sabbatic Year. Obviously, if all the people are observing a rest year, they will have no source of income with which to repay their debts.

The concept of a rest year is important because it plays out on an even grander cycle.

The third manifestation of the Sabbath concept is seven times seven years, or 49 years total. Every 49 years marks what is called “The Jubilee.” It is a year of release in which all debts are canceled. All men go free and return to their inheritance.

In a Sabbatic Year, there is only remission of debts. It’s like hitting the “Pause” button. After the Sabbatic Year is over, the debtor must continue to make payments against his debt.

A Jubilee Year is different because it’s a year in which all debts are canceled. It makes no difference how much a man owes. Every last penny of debt is forgiven, and he starts afresh during the new Jubilee cycle.

This is the mercy factor that is built into God’s law. Unfortunately, God’s law has been shoved aside by even “religious” people, and the biblical concept of debt forgiveness has been all but forgotten.

But right now, we don’t need a bloated stimulus package — we need a Jubilee. If our government were to declare a Jubilee, we could all start over. Of course, some would inevitably fall into debt again, but many would be more financially responsible.

Ultimately, I think a Jubilee would be a blessing for all people. Will our government declare a Jubilee? Probably not. Still, it is an important concept to understand as we try to deal with the weight of excessive debt.