Smart Banking Guide

Cheap Credit

Written on October 5, 2009 – 10:27 PM | by dodolovesme

Another basic cause of inflation is the periodic excessively easy availability of cheap credit.

Easy and cheap credit might be well and good for people who need to purchase goods. However, it has the negative effect that the buyers do not haggle over prices as much as they would if they had to pay cash or take up expensive and hard-to-obtain loans with which to pay for them. In the circumstances of cheap credit, producers and sellers of goods find themselves able to sell everything they produce, at their asking prices. They do not, therefore, find it necessary to make their operations more productive by cutting out wasteful practices. As a result, the prices of their goods rise faster and to higher levels than would otherwise be the case — and the blame for these rapidly rising prices is laid at the door of “inflation“.

The factories which manufacture goods find themselves booming as a result of the easy credit situation, and as a result they are tempted to expand their operations. For this, they need more staff, and as there might not be enough trained people to fill all the jobs available, the employers offer salaries and wages higher than the job is really worth, simply in order to attract the staff they need. Employees start “job- hopping” — flitting from job to job for higher pay without having to give more or better services in return for this higher pay. This situation of higher wages through “more jobs than there are people” further pushes up company costs and thereby also increases the costs of the goods or services which they produce — and the poor consumer finds himself facing further “inflation“.

Then comes the end of the country’s ability to provide ever-more cheap credit, simply because, like a spendthrift person, it has run out of money. The providers of loan capital find themselves able to increase their prices as the demand for their “goods” increases — which they do by increasing the interest rates they charge borrowers. Loans accordingly become more expensive, the monthly repayments on loans rise to heights never known before, and as a result, people find it more difficult and, ultimately, impossible to purchase further goods on credit.

However, when factories which have geared themselves to a high level of production find their markets suddenly shrinking to half of their previous levels, they sit with what is termed “surplus production capacity”. They still have to continue paying off on the large buildings they have erected and the vast amounts of plant they have installed, and so they have to increase the costs of their products to avoid going bankrupt — in the process fanning inflation still more! Since they cannot afford to employ as many people as in the boom time, they retrench staff (that is, dismiss workers, not for any misdemeanour on the part of the workers, but simply because there is no need to keep them or ability to continue paying them). These unemployed people, in their turn, find themselves unable to purchase goods, which still further reduces the market for manufactured products and puts yet further pressure on the manufacturing sector to raise its unit prices at a time when the public is least able to afford higher prices.

Additional causes of inflation are uncontrolled speculation, the illegal filtering of goods out of the country and excessive population increase.

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Tags: cheap, cheap credit, credit, goods, inflation, people, prices