Tuesday, August 12, 2008


(Week 3 - Tuesday Aug. 12)

I invite the reader to return to the image I drew in yesterday's column of the person paying for a garment with a credit card. The card is swiped through the register and approved in a preprogrammed electronic process, after which a number appears on the monitor. This number represents new dollars that are being created in that moment by the bank that issued the card. The card holder then signs a printed "receipt," which is in reality a contract with the bank by which the cardholder promises "pay back" the money, plus an "interest" charge, if he does not do so in full within the first month.

The new money that was just created ($50 in the case of our example) is passed electronically into the bank account of the store owner, and now becomes part of the funds he has available to pay his cost of merchandise, wages, building rent, lighting, etc. As he does so, that $50 enters into general circulation as part of our public money supply.

Let us assume that the consumer makes other charges to the card on a regular basis. He will receive a statement from the credit card company at the end of each month that lists the amount of each new charge. The total for these items is precisely the amount of new money he, along with the bank, created and spent into circulation by the use of his card.

Looking over the monthly statement, the consumer will also notice that the credit card company is demanding to be paid back considerably more money than it "lent." There would be an "interest" charge that can run as high as 39.99%, plus, likely, other fees and penalties. If he is carrying a significant balance, the cost of these extra charges can mount to a level where he has all he can do to pay only the interest and fees, without reducing the balance owed.

He may elect to make what is noted on the monthly billing as the "minimum payment," which often covers little more that the "interest," plus fees and penalties. On a $10,000 balance this can add up to $300 dollars for the month, which, in turn, diminishes by that sum the amount of money the card holder has available to make payments against the balance owed. Let us suppose, as is common, he falls into the routine of making only the minimum payment month-after-month, and the balance remains essentially the same (even if he does not make any new purchases). He enters what is called in the credit card industry the "revolving door." He makes hefty payments, but makes little, if any, progress on paying down the loan.

The important question for this discussion is, "What are the larger implications of falling into the revolving-door trap?"

In Col. #5 ("Where Does Our Money Go?") I described how, when one makes a payment on a bank loan, it is divided into two parts. One portion of the money is applied to retiring the principal of the loan, and is extinguished. The other passes into the account of an "investor," who has obtained the privilege of receiving the money that is paid in as "interest" by buying the rights to the "debt" contract by which the loan was secured. Such an "investor," typically, will not put that money back into circulation by spending it, but will instead withhold it from circulation until he finds a place to "reinvest it" (i.e. finds someone to re-loan it to). The "interest" payment is thereby transformed into more "debt," and released back into circulation. This constant recirculation of "interest" payments through the "private-investor" mill, then, is the very engine that is driving the economy ever further into overwhelming "debt."

The point to be noted here is that, with the widespread advent of credit cards, the predatory practices associated with their promotion, and the ever more usurious terms of their use, the speed with which we the people are descending into "debt" has quickened to a dizzying pace. What is more, the practice has become so widespread that almost anyone with an economic life in the modern world has engaged in it, increasingly with a degree of regularity. I would pose the question, "How many of us ever take thought of the full implications of what we routinely do so unthinkingly with this one simple act?"

I would hasten to add a caveat. It is not my intention here to make moral judgments about anyone's use of credit cards. Truth be told, I use them also. My purpose is to raise our awareness of what we are doing in this act, as in all financial matters, to the point where we can penetrate to the heart of what is actually transpiring when we perform it. This will, I believe, helps us discover a way to move forward into our economic future with a real solution to our "debt" crisis.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.