Thursday, October 9, 2008
In this Martenson Report, I cover the importance of the credit markets to the smooth functioning of our just-in-time economy. If the credit markets fully seize up, it is not a stretch to state that most businesses and the flow of many goods will also seize up.
In fact, this has already happened, to a limited extent. Should this extend further, there are a few basic precautions that you should consider as a means of mitigating the impact of a potential banking/credit lock-up.
Okay, time for a little chat about the reasons that a credit market freeze-up has the potential to change your life in sudden and dramatic ways.
Many people mistakenly believe that at some point in the distant past we moved from a barter economy to a money-based economy. In truth, we have a credit-based economy.
In a money-based, or “cash-based,” economy, the whole thing would work a lot like your debit card. Businesses would immediately swap money for goods at the point of the transaction.
But that’s not how our system operates. Instead, when goods flow between distributors, suppliers, and retailers, they do so on the basis of credit. For example, if your local grocery chain orders additional food from their distributor, credit is what gets that transaction moving right away. The grocery store has a line of credit with the distributor, which has a line of credit with their bank, which has lines of credit with other banks, one of which has a credit arrangement with the grocery store.
Typically, businesses carry 30-60-90-day terms on cash settlement for goods and services sent/received. So the lines of credit are an important ‘lubricant’ to the process of buying and selling goods, with cash settlement coming after-the-fact and often comprising a bulk payment for numerous credit-based transactions that might have occurred over a period of time.
At the larger level, credit transactions worth trillions of dollars are occurring between importers and exporters, with municipality paychecks, between nations, in stock margin accounts, and so forth. Credit is everywhere and it is how we conduct business. Without credit, we’d need to revert to a cash-based economy (hard cash or the electronic equivalent) and the simple fact is that our financial and judicial machinery are just not set up to handle a cash-based economy.