Friday, August 15, 2008


(Week 3 - Friday Aug. 15)

So far this week I have described the credit card phenomenon as a great engine of money (and therefore "debt") creation that has been handed over to (some say foisted upon) the common citizen, and is pressuring many into an unmanageable "debt" burden. In my view, this remains true, but there is another side.

There is a great loophole in the credit card scheme. That is, if one pays off one's balance in full when the bill arrives at the end of the month, then one does not have to pay any charges for "interest," fees or penalties. That means that by borrowing money from a bank using a credit card, and then paying off the full balance at the end of every month, one is causing to be issued into circulation money on which an "interest" or other charge is never paid (admittedly for only a month, but when multiplied by millions of such cardholders the numbers add up).

This is the only significant source of "interest-free" money currently entering into circulation that I know of, and it comes directly from the use of the instrument of finance that is greasing the slide of the less fortunate and the nation as a whole most speedily into "debt."

This loophole has not gone unnoticed by the banks and credit card companies. In fact, there was talk in the industry about lobbying for legislation that would shut down this obvious free ride, but that has abated largely because its beneficiaries tend to be of the wealthiest and most politically-connected segment of the population. So, naturally, the cost of the system would just have to be borne by those in the middle or near the bottom of the economic totem, especially the one's that experience the need to rely on the card for necessities.

This apparently disproportionate burden would be exacerbated by the passing of a new bankruptcy law (in 2005) that would insure that even the relief offered by that extreme measure would become more expensive and difficult to access.

By the way, the credit card profession has a name for those who pay up their debt every month - "deadbeats." For customers, they very much prefer the late-paying-trying-to-survive-on-their-way-to-bankruptcy"revolvers" (those struggling to make minimum monthly payments). From what I have seen, card-company practices are evidently designed to nudge as many of their "deadbeat" customers as possible into the "revolver" category.

This adds a twist of irony to the words of a credit-card industry spokesman I once saw on TV testifying to a congressional committee about the proposed industry-sponsored "bankruptcy reform bill." He said, in effect, that it was needed to protect their reliably-paying customers from the costs occasioned by the irresponsible behavior of those that were having difficulty in 'meeting their obligations.' (i.e. to protect the "deadbeats" from the "revolvers").

Lest I leave the impression that I am being moralistic, permit me to give the issue another twist. I would say that for those "deadbeats" that can afford to charge on their card and pay off their living expenses every month, let them do it (I did when I could afford it). The money that they bring into circulation thereby will help not only their personal finances, but also serve to bring into circulation the only significant sum of currency in the money supply for which nobody in the society is paying an "interest" charge to keep it there. That could be deemed as a boon to everyone.

To wrap it up let me say that I am not offering anyone moral or financial advice. That is not what I do. What I am trying to accomplish is to draw a picture that will bring into focus the profoundly paradoxical effects and implications of credit card use as currently practiced, and how the credit-card phenomenon is a microcosm of the monetary system itself in the present era. Tomorrow's final column of the week about the credit card will examine what is perhaps the greatest paradox of all.

Richard Kotlarz

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