“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.