Sunday, August 17, 2014

The unstable economic system

In the old days, we used to have barter system. It was a slow system but quite stable in its nature. People cannot leverage much, as the possibility to move the commodities at a faster rate was not possible. The commodities were first class citizens in the world of exchange and not buried deep down under a chain of instruments and promissory notes. The economy cannot run berserk in either direction, because the commodities cannot run fast or sometimes cannot run at all. The capacity to divide the commodity maynot be even possible in many cases.

However it has its own disadvantages as their were chances that the underlying commodity can loose its value completely. For example the housing prices crashing in the current recession. But the impact of that would be limited to a very narrow section of economic system and would actually rightfully punish people who have leveraged themselves without understanding their capabilities. On the contrast, the present housing crisis has a repel effect on the whole system. In theory, only the end parties will get effected, but then it's a chain. The strength of a chain is its weakest link.
We have compounded our problems further in the currency system by borrowing our futures in every aspect of life. I can understand buying a house on loan but I could never understand buying a fancy shoes on it and when one chooses to pay it in instalments with an interest on it.Worse than that at any point a piece of currency gets involved in size of trades, worth more than its intrinsic capacity. I would buy a shoes without paying anything but let's assume the same worth of currency in my hand gets associated against that transaction. Now that cash in hand gets deployed on something else, maybe eating in an expensive restaurant. 

Even If I do not spend that cash, it's very common to take more credit against that cash in my hand and and not taking care that we are spending the same money. Worse than that, I might be expecting that money will come in my hand in future from my salary or other payments. What happens when I loose my job and that money never comes to me? This is a serious danger we are running in our society and happens every day. People have accepted credit taking as part of their life and unfortunately the government and big business houses promote it as it brings the sense of financial prosperity. Taking credit for asset building makes sense but taking credit for consumption!!!

Taking loan for a vacation???

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