Deleveraging Your Life
|October 7, 2008||Posted by Roshawn Watson under Uncategorized|
Many cash-strapped financial institutions are liquidating assets. In many cases, these assets are debts that are owed them. Because these sales are forced, it drives down the prices/values of these assets for other investors, thereby worsening the blow to the already-hemorrhaging economy.
The Credit Issues
One of the biggest areas affected is credit. Not only are lending criteria becoming more stringent, but the supply of credit is simultaneously decreasing. For example, a Barclay Capital representative stated that if bank capital was reduced by $170 billion, the credit supply would be decreased by $1.7 trillion.
Instead of lamenting the decreased availability of credit, many consumers welcome the change. With economic headlines dominating the media, consumers are beginning to save more and borrow less. Regardless of whether our own household finances have been affected, many feel broke and are concerned about how these turbulent economic transitions will affect them.
Collectively, we’re finally getting concerned with our own balance sheets and making changes to resolve our financial problems. For example, not only have SUV sales tanked, America has seen some of the weakest car sales since 1993 according to Bloomberg. Consumers are making fewer discretionary purchases. Because of the general decline in demand, businesses rapidly are shedding jobs and are unable to pay their debtors, creating more bad debts.
One of the goals of the bailout is to prevent the deleveraging cycle. Some economists bemoan consumers cutting back on spending stating that it further damages a struggling economy. However, from a personal finance standpoint, individual deleveraging is a good thing. Typically, this means coming out of debt, and for the majority of consumers, there is no prosperity on credit. There’s only bondage to car loans, Sallie Mae, and credit cards. For struggling consumers, making cut-backs on unnecessary expenses and credit is a very good thing, especially long term. Furthermore, consumers with strong balance sheets will not be buried in debt, will have money and feel comfortable spending, which is ultimately good for the economy. The problem isn’t with the consumers spending less but with businesses being built on the backs of broke indebted consumers.
Just as companies are cutting their fat, it is time for us to make the necessary changes that put our families in the best position financially. If you think that you need to cut back, you probably do. Remember, what’s most important is your economy, and typically that involves stopping the financial hemorrhaging (getting rid of debts) so that you have money to invest, spend, and give.
Lastly, if you like this post, please subscribe, click here to get my Brand New eBook FREE, and Propel it, Stumble it, and tag it on Delicious.
Copyright 2008, Roshawn Watson, Pharm.D. All Rights Reserved.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.