Credit and its impact

Credit and its impact

The easiest way of having growth and improving standards of living in a country are to get to grow on cheap credit. Creditors however have to be paid back one day, such that the growth and progress remains temporary. Rightly said by thinkers across all societies, being in debt remains the biggest curse on an individual and pretty much so on a country.

We have seen some rapid growth in India since 2000 to 2008 a scenario we tend to see across the world. The growth though initially fuelled by cheap Yen and mostly in the European part of the world, with USD rates near zero, cheap dollar fuelled growth from 2000 onwards. In addition most governments across the world have printed money, resulting in inflation seen mostly in necessary items.

Most economies have responded by offering more credit. It’s like Mr. Marc Faber pointed out, you give more drugs to a person who is habituated to drugs to solve the problem.

In the context of India, money printing and cheap credit have created extraordinary bubbles in the last few years, particularly in the real estate market. Markets have an elastic tendency. They always tend to overshoot when bullish beyond the normal and pull back more than normal when bearish.  In addition to the above two factors, money printing and availability of cheap credit we also have the contribution from the black economy. We have seen the greatest so far bubble in India both in the commercial property market as well as the individual home owners market.

The point I am making is that further growth in the real estate sector is unsustainable and a likely recession is going to happen. Tough times for lot of companies since most have taken loans against real estate they own. Once banks will need to do Mark to Market, companies will be forced to look for new loans or pay the bank. Likely to create a further depression in the market.  This is why too much of anything is bad.  In this case too much of credit.

This is an illusion of prosperity, that eventually leads to debasement of one’s currency.  Credit is good as long as one knows how to remove it again after the temporary injection of money to the economy.  In case the created credit stays, it eventually outlives its purpose and creates inflation. Mild inflation might be good, but excessive credit leads to rise in the prices of basic goods and tough times for the common man.