How Credit Might Help The Economy
In places like Nigeria, we tend to vilify credit and lending. Borrowing can be seen as shameful and lenders, accosted as Shylock. But Credit might be just the fuel we need to accelerate the growth of our economy. In fact, it might be a tipping factor.
Credit, for the sake of clarity is a transaction between the lender and borrower, where the borrower agrees to pay back the money in the future, usually with an interest. The lender can be anyone including the government and the borrower can be anyone; again including the government.
Credit leads to an increase in spending. Regardless of whether it is “bad” or “good” debt, the money is spent; commerce is boosted and a debt cycle is on the move. When credit is given to a person or entity, they make purchases which leads to higher income levels, higher GDP and faster productivity.
Economic Cycles & Debt
An economic cycle is the journey of the economy through growth and recession. It is made up of 4 stages;
Expansion, Peak, Recession and Trough. An economy is best when it’s expanding and it is characterized by rising GDP, low unemployment, healthy sales and steady wage growth. When inflation begins to rise but growth starts to slow down, an economy is at peak. A decline of everything else is a recession and a Trough when nothing is moving upwards except inflation. An economy would normally go through multiples of this cycle as it grows just like demonstrated above. But, it can be a dangerous thing to be stuck receding for too long.
There are strong arguments and evidence that a mass credit culture can be a boost to leaving the trough; especially if coordinated properly.
Often times, people think that a debt cycle can be an infinity loop. This isn’t necessarily true and why regulation is important. Factors like high interest rates and deleveraging can be used to control the demand for credit and in a robust economy, we might then focus on combating inflation with contractionary monetary policy (reduce bond prices, increase interest rate).
To embrace an expansionary monetary policy is to keep low interest credit as an essential factor. Lenders perform best during this time. Increased consumer spending because of low interest loans favor lenders and banks.
Let’s not forget that Credit is a good way to make the otherwise, stagnant money from wealthy people circulate in an economy. There is no building a functioning economic machine without encouraging lending and borrowing.
Making Credit Work
To make credit boost; not wreck an economy is to create a functional credit ecosystem. The government, central bank, deposit & mortgage banks and other participatory financial institutions need to be in synchronization. Essential factors like costumer and enterprise data need to be collated and up to date. Credit history needs to be central and easily available. A robust framework that encourages lending, makes recovery easy and disciplines non compliance. Perhaps, there needs to be government backed and private owned bailiffs.
Breaking the socio-cultural bias is in education. In making people understand that credit can be a force for good, both in their personal lives and for the general economy, as long as it is being utilized properly.
This is a very simplified version of how credit can largely play into the economy and I would genuinely appreciate questions and comments about it.
