The World Is One Big Credit Card That’s About To Default

“Everything would tick along perfectly well – until the credit card companies realised they weren’t making any money, and called a halt to the 0% interest rate deals. Then everyone would have to pay back the money they borrowed in the first place. The property market would collapse as people sold houses to pay back loans. Stock markets would plunge. It would be a financial disaster.” – MoneyWeek.com Feb. 27, 2006

Chicken Smith View:

If you read the entire MoneyWeek article, they discuss something called Stoozing which is when you borrow money at a low interest rate (ie, Introductory 0% Credit Card Offer) and you deposit it into a safe investment (ie, 5% Online Savings Account). Before the credit card’s introductory offer expires, you either pay it back and keep the interest payments or you keep moving the debt into another 0% offer. Meanwhile, you’re earning 5 percent off the money in the bank.

Now if you’re talking about credit cards, it’s probably not a lot of money we’re talking about. Let’s say you borrow $30k on your credit card offers at 0%, you put that money in the bank at 5% interest. Let’s say you manage to juggle the debt for one year. The most you’ll make is about $1500 for the year.

Now that may not be so bad if it didn’t cost anything, but it would require a lot of time, effort and careful management making sure not to exceed the introductory periods and not to spend the initial capital, otherwise, you’ll lose any chance of making a profit. I’m sure many will be tempted to try it, however, it generally requires opening new credit cards and that can negatively affect your credit score.

So obviously, this is not a get rich quick scheme, however, if you translate a similar scenario onto the global stage by large corporations in the millions of dollars, now we’re talking serious money. Sadly, this is going on right now throughout the investment world, however investors don’t call it Stoozing, the term they prefer to use is called Carry Trade.

It might as well be funny money, because what it does is it artificially inflates market prices, as everyone is essentially “buying” on credit. Eventually, when the bill for the original balance needs to get paid or if the interest rates suddenly change, someone is left holding the hot potato and fortunes can be wiped out.

This is what’s going to sour the global economy. According to HSBC Currency Strategist, David Bloom, “The carry trade has pervaded every single instrument imaginable, credit spreads, bonds spreads: everything is poisoned.”

This is what passes for record profits in so many markets. It’s a house of cards and the winds of change are starting to blow. Everything is being bought on credit in one way or another, both at the consumer level and at the professional investor level, this cannot go on forever, and it will get ugly. Banks are starting to feel the pain and are scrambling to get an influx of some real cash by offering high interest rates on savings accounts. It may be too late. If anything can be learned from this, it is; you stooze, you lose.

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3 Responses to The World Is One Big Credit Card That’s About To Default

  1. ngwingchi says:

    Keep things simple. If my credits cards are ill managed, I will get loss; but, someone has to be there to gain what I lose. They are the bankers.

    But for carry trade, they are not credits card. Global econ is not spending the money of future by carry trade. In fact, if you believe inflation is a response to monetary policy rather than so called increase in costs like oil, then carry trade is simply a tax to the …Japanese.

    Plain paper money means that extra green painted by Federal will reduce purchasing power of already existing papers. In effect, it is a tax to who have cash.

    Japan gov keep rate low and print a lot. It is a tax to Japaneses, and the revenue is transferred to other part of the world. Others suffer, we gain. So, why not?

  2. Wallace says:

    Thanks for the addition information on how people
    can improve their credit. The more good advice a
    person gets the better.

  3. L says:

    If you need to see what’s happening in the markets as a big picture read the new book
    by Bill Bonner and Lila Rajiva – from the same Daily Reckoning Crew that gave you the New York Times best sellers like Empire of Debt:

    http://www.amazon.com/Mobs-Messiahs-Markets-Surviving-Spectacle/dp/0470112328

    “Mobs, Markets and Messiahs,” tells the story of the financializing of the economy and the huge credit bubble.

    “Learn about Fed bubbles, and make Ben Bernanke unhappy: Read this book,”
    – Lew Rockwell, President of The Ludwig von Mises Institute

    Here’s what Marc Faber says about it:

    If I had to name just one book investors should read, this is the one I would select,”
    –Dr. Marc Faber, editor of the maverick “Gloom Boom and Doom Report” and author of the Amazon best seller, “Tomorrow’s Gold– Asia’s Age of Discovery

    HereAs fun to read as it is thought-provoking,”
    – John Mauldin, author of the New York Times best seller, Bull’s Eye Investing and editor of “Thoughts from the Frontline’s what John Mauldin says about it:

    http://lilarajiva.wordpress.com/mobs-messiahs-and-markets/

    In attempting an answer, the authors weave a light-hearted journey through history, politics and finance to show group think at work in an improbable array of instances, from medieval crusades to the architectural follies of hedge-fund managers. Their journey takes them ultimately to the desk of the chairman of the Federal Reserve Bank and to a cautionary tale of the current bubble economy. They warn that the gush of credit let loose by Alan Greenspan and multiplied by the sophisticated number games of Wall Street whizzes is fraught with perils for the unwary. Boom without end, pronounces The Street. But Bonner and Rajiva are more cynical. When the higher math and the greater greed come together, watch out below!

    Mobs, Messiahs, and Markets ends by giving concrete advice on how readers can avoid what the authors call the ‘public spectacle’ of modern finance, and become, instead, ‘private’ investors – knowing their own mind and following their own intuitions. The authors have no gimmicks to offer here – but instead give a better understanding of the dynamics of market behavior, allowing prudent investors to protect themselves from the fads and follies of the investment markets.

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