We stopped at Cabela's on the way home from church a week ago Sunday because my stepson wanted to buy a pair of boots he had seen there and on Sunday had in hand the cash to buy them. He found his boots and paid with cash, but I also found a pair of shoes to replace my everyday shoes which my wife said needed to be demoted in their use to lawn mowing. I also found a hat to replace the one I misplaced last spring -- perhaps it was also stolen like the one taken from her car the year before when thieves broke out her window and grabbed my hat and coat, among other things.
Anyway, I intended to pay with my debit card from money in my bank account, but the clerk offered a $25 discount if I applied for a Cabela's credit card and used it to pay. I decided to go for the $25 savings and get a card. In addition to walking around the store a bit longer while I waited for my application to be entered and processed -- something which can be dangerous to do if a fellow is trying to guard his wallet and not buy anything else -- I expect the new license to purchase goods on credit from a store which features almost anything an outdoorsman might need or desire could encourage additional purchases.
But why would Cabela's offer me points and a $25 discount on my first purchase if I used the company's credit card? I know it's a business decision to benefit Cabela's. Perhaps if I have a nice line of credit, I'll buy that something I otherwise would have put off until I had the cash in hand. Cabela's will benefit from the added sale. The bankers and lenders -- and probably Cabela's, too -- behind the card will benefit from interest earned if I don't pay my full balance each billing cycle. And me, well, I saved $25 off my first purchase and may save more in the future if I use my card wisely and pay any incurred balance off each month to avoid interest.
The problem I see is that Cabela's and the lenders behind the credit card are betting I'll make some larger purchases than I would normally make using my debit card and, at least sometimes, take more than a billing cycle to pay off my balance in full. In that case, Cabela's will win because of the added sales. The lender will win because of interest paid. And me, I will lose because I not only paid the purchase price, but a percentage of the balance in interest.
I suppose it is possible that, because of inflation, the item I purchase today might go up in price to the point that I actually save money by purchasing now and paying interest rather than waiting and paying cash. It is theoretically possible and, in the case of some items which become overvalued because of fears they will no longer be available, it may be likely. Of course, with some items, it can go the other way. New technology is an example. What costs a fortune when the technology is new may go for a fraction of the cost when the technology has been around a year or two.
My point in rambling on about purchasing with credit deals more with what this all could mean on a larger scale. It seems that, more and more, almost everything people purchase is on credit. It's not only homes and automobiles; it's even clothing and groceries. And for many people, they are satisfied as long as they can make the minimum payments even though the total balance on the monthly bills continues to grow.
Yes, it's true the federal government is guilty of this on a grand scale. If we need something now, or think we do, we buy it on credit and the debt -- whether it's private or public -- continues to grow. Yes, it keeps the economy going and, without it, the economy would probably be in deeper trouble than most of us realize. But a problem comes when debt reaches a level which forces private citizens, businesses and governments to tighten their belts, cut up their credit cards and quit buying and producing.
Already in the U.S. private debt is greater and growing faster than the gross domestic product. What does that mean? To put it simply, if we are borrowing more than we produce, a day of reckoning is likely to follow. At some point, it will cost more to service the debt than people, businesses and governments can pay. And, as the debt grows, individuals and businesses will be forced to deleverage and buy less and produce less to devote more of their income to debt repayment to avoid bankruptcy. And, of course, if we buy less and produce less, the GDP goes down -- it already is -- and the crisis worsens.
When lenders and investors see or fear they may not be repaid, they are going to want out and will sell off or cash in. And if they do that, what happens to the value in holding debt? And if lending dries up and people try to withdraw their cash from banks, we may find ourselves in a situation like Greece where credit cards and debit cards become worthless and a fellow can't even withdraw the money he has under his name in the bank -- there isn't nearly enough cash in circulation to back up electronic debt anyway.
We are somewhat in a "Catch-22" situation. If we continue credit-based spending like we are now, a day of reckoning is likely coming when the amount of private debt is so great that more and more people begin to default on loans, those invested in public debt try to cash in and get out before it's too late and available credit simply dries up and is gone. The pumping of more and more dollars of debt into the system by the Federal Reserve Bank is not likely to save the day. While some suggest debt restructuring or forgiving debt of private borrowers, the moral hazard problem remains an issue. Will a lack of accountability for one's bad choices today lead to more bad choices tomorrow?
On the other hand, if we cut back now and deleverage to reduce our indebtedness, the GDP will go down more, meaning less jobs and less confidence in the economy. That too could lead to economic difficulties. Which is better?
In either case, those who can are likely to hoard cash, other forms of currency or barter items; and those who can't are eventually likely to find their credit gone and bank accounts severely restricted or closed. The picture isn't going to be pretty.
So, I'm in a dilemma. I saved $25 at Cabela's and now have a line of credit there. Do I use my card to keep the economy going? Or do I be frugal, buy nothing I can't pay for at the next billing cycle and further restrict the GDP? It's a tough call. Maybe I should buy that survival gear Mrs. Griz and I will need if the economy tanks. The question is this: If I wait until I can afford it, will it be too late?
Randy Moll is the managing editor of the Westside Eagle Observer. He may be contacted by email at [email protected]. Opinions expressed are those of the author.
Editorial on 10/07/2015