Deleveraging Your Life
| October 7, 2008 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Many cash-strapped financial institutions are liquidating assets. In many cases, these assets are debts that are owed them. Because these sales are forced, it drives down the prices/values of these assets for other investors, thereby worsening the blow to the already-hemorrhaging economy.
The Credit Issues
One of the biggest areas affected is credit. Not only are lending criteria becoming more stringent, but the supply of credit is simultaneously decreasing. For example, a Barclay Capital representative stated that if bank capital was reduced by $170 billion, the credit supply would be decreased by $1.7 trillion.
Instead of lamenting the decreased availability of credit, many consumers welcome the change. With economic headlines dominating the media, consumers are beginning to save more and borrow less. Regardless of whether our own household finances have been affected, many feel broke and are concerned about how these turbulent economic transitions will affect them.
Collectively, we’re finally getting concerned with our own balance sheets and making changes to resolve our financial problems. For example, not only have SUV sales tanked, America has seen some of the weakest car sales since 1993 according to Bloomberg. Consumers are making fewer discretionary purchases. Because of the general decline in demand, businesses rapidly are shedding jobs and are unable to pay their debtors, creating more bad debts.
Consumer Deleveraging
One of the goals of the bailout is to prevent the deleveraging cycle. Some economists bemoan consumers cutting back on spending stating that it further damages a struggling economy. However, from a personal finance standpoint, individual deleveraging is a good thing. Typically, this means coming out of debt, and for the majority of consumers, there is no prosperity on credit. There’s only bondage to car loans, Sallie Mae, and credit cards. For struggling consumers, making cut-backs on unnecessary expenses and credit is a very good thing, especially long term. Furthermore, consumers with strong balance sheets will not be buried in debt, will have money and feel comfortable spending, which is ultimately good for the economy. The problem isn’t with the consumers spending less but with businesses being built on the backs of broke indebted consumers.
Just as companies are cutting their fat, it is time for us to make the necessary changes that put our families in the best position financially. If you think that you need to cut back, you probably do. Remember, what’s most important is your economy, and typically that involves stopping the financial hemorrhaging (getting rid of debts) so that you have money to invest, spend, and give.
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Copyright 2008, Roshawn Watson, Pharm.D. All Rights Reserved.
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I agree Shawn. Corporate America is getting rid of bad credit and debt and trying to get their hands on as much liquid cash as they can. So should the average Joe. Regular people should move to operating from a basis of strength, a cash system. Unfortunately, the more I read about what the everyday folks are saying the sadder I get. You suggested in one of your latest posts that we're in financial war for our lives & our futures. Have you checked out CNN's What Real Americans are saying about the economic crisis (http://money.cnn.com/galleries/2008/moneymag/0810/gallery.crisis_real_people.moneymag/index.html)? So many seem so scared to venture out and take financial responsibility…they're trusting that the government will "bail" them out too and it will all blow over. So sad….
FD,I share your sentiments. If most people would just take some financial responsibility, they can change their individual circumstances significantly. Depending on the government to support you is waiting for welfare: even if they do give you a few crumbs, you still struggling tremendously.
Everyone knows that the economy will suffer further if everyone chose to tighten his belt. However, most will take care of their personal economy first. How to look at, and take care of, the big picture when your own pocket is burning? It is a question I'm sure a lot of people would want an answer.
Well, I understand your concern but I respectfully disagree that the economy would suffer if people chose to get tighten their belts until they had real money. First, everyone will not tighten their belts simultaneously. People will choose to correct their finances as they become enlightened and persuaded to be better financial stewarts of their houses. Also, people in more stable financial positions typically spend more because they have more discretionary funds (as discussed in the article). This is what I want for all of us (especially my readers): to be in a position where our economies are doing just fine. Ultimately, when we are all doing well, the overall US (and world) economy benefits. Moreover, this growth won't be based on debt (yuck!)Cheers,Thanks for the comment!
Vivienne-I don't think the economy will suffer if consumers switch to good financial habits and mind their spending. Despite the current state of our economy, people will still buy groceries, gas for their cars, the light bill, etc. They may simply cut back on the "extras" or the higher end purchases like that 60 in flat screen tv. Money will still be moving, business will still go on. In fact, even in this current economic crisis Walmart sales have increased. Again, business will still go on–its just consumers will hopefully be more prone to operating from a cash basis.