Anatomy of the consumer credit crunch

Human Action has repeatedly spoken of the implications of unbounded credit growth, and why this is the primary cause of the business cycle. Through slight of hand, the Reserve Bank increases the amount of debt and broad money in the economy, which lowers interest rates, all done in the Keynesian name of stimulating ‘growth’ and creating jobs. As a result, consumers float up on credit cloud nine and believe this new economic system that we’re running on – ‘free market capitalism’ – is IT.  This leads to over-consumption and under-saving. Who needs to save when we have struck the eternal fountain of wealth? And of course, be damned if you say this tap will be turned off any time soon.

If you’re thinking this is just Human Action’s ‘theory’ on the economy – you’d be wrong – this is what’s happening in the real world. How else do you think SA’s black middle class, popularly referred to as ‘black diamonds’, grew by 30% from 2006 to 2007?

According to the National Credit Regulator there were 17.9 million credit-active consumers in South Africa in June 2009. Only 56% of these were in good standing, and nearly 17% are three months in arrears. Clearly, as can be seen in the table, the trend is for the worse.

According to SARS only 5.3 million people are actually registered to pay tax. The scary thing is that the number of people in poor standing on their credit accounts exceeds the number of actual taxpayers. So there is a substantial amount of low-income earners that have made purchases on credit. Low-income earners are also the most likely to lose their jobs first – ensuring the trend of rising consumers in poor standing continues unabated.

How can people who can’t even afford to pay taxes be considered for a credit account? Obviously there is something seriously wrong here. The poorest classes can’t support the state, yet are sustaining their livelihoods on credit. There will be more pressure on the government to support these people through the UIF, direct transfers/subsidies, and child grants, which of course will lead to rising budget deficits. We don’t even mention the implications rising bad debts will have on the banking sector and the support that would be forthcoming from the SARB. The irony of it all is that the tools the government will use to solve the problem – namely, deficit spending by the government and inflation by the SARB – are the primary cause of rising consumer prices, falling real incomes, bad debt and rising poverty.

Go figure.