Would the economy collapse?

Question

If everyone conducted their business as I do, which is pay as you go? The only thing I owe on is my home, and I owe less than 20% of the market value, have been paying it down fast. I save and buy a car, pay the entire credit card bill every month. If NO ONE in this country was strung out on credit, what would happen with the economy?

Serious students of economics only, please.

Answer 1

To be blunt, if no one was "strung out on credit" our standard of living in this country would drop precipitously. Lines of credit allow us to smooth consumption over our lives. For example, someone with a young family who wants a car and a home would have to live on an extreme budget for years and years until they saved up enough to buy all the things they demand. However, the ability to use credit allows them to satisfy their demands in the present while paying for these goods over a longer time. Essentially, credit and debt lets us live beyond our means. If we eliminated these financial tools GDP would fall, consumer spending would drop, human capital (eduacation) would diminish, and quality of living would drop.

If we all stopped borrowing from financial intermediaries (be it banks o

Answer 2

In a dream world, you might see everyone without large debts. This is a real world, so you will never see people pay cash for everything. In reality, people will never earn enough to own things that they do. Cost of living is up and inflation is doing the same, you will need continual growth in gross income.
In order to see something alike, you will need to change our culture. Many of us have certain expectations. If you earn 30,000 dollars a year, then you have certain lifestyle that people believe and you live by that, well most people do, especially young people. Six figure job would only mean, you will up your spending that is with certain unknown flow.
Of course, credit is becoming a big problem since velocity of spending is too fast compare to monetary increase. You can't increase quantity of money just because velocity is too fast. Unless we close down on expenditure on Chinese or other third world country products, we will not see growth meeting the expectation or money power. Or we can stop using so much credit. The real irony is that we are spending money that has not been made yet. I would open my Int. Macro book, but I'm too lazy.

Answer 3

The economy will run great! In the case example you gave, means that you have sufficient income every month to cope with all the expenses.

In your example you could live with an ideal economics where from the income you earned you could still make an investment and saving while spending for your consumptions (Y = C + I + S).

No bad credits means the banks will be in very sound condition and they could enhance their lending capabilities to the production sector. Expanding production sector means employment of people and the natural resources. This will lead to the increasing traffic of goods and services between countries, opening new opportunities with others. Next the country's Balance of Payment is growing, GDP and GNP growing, the country's economy is growing.

Hope this explains.

Answer 4

The economy would be fine. As a matter of fact, you sound like me.
You save now, but at some point that money will get spent. Whether you spend it before you die or pass it along to someone else.
Also, people's credit would be fantastic. That would mean banks would be more willing to give loans (at lower rates) to entrepreneurs, which means innovation, jobs and higher standards of living.
Also, the tremendous amount of taxpayer money spent on social programs would be greatly decreased, further stimulating the economy.
If everyone were like you, you would have MORE money than you have now because the economy would be stronger. You would have probably bought a slightly more expensive car and house. Again adding to the economy.
.

Answer 5

No the economy would not collapse. The history of the credit card started in 1958, so people that bought items before 1958 had to pay with cash or check. The problem is that people overextend themselves figuring they can pay it back in a year. If you use a credit card, pay it off each month.

Answer 6

Basically, there would be more funding available in the "loanable funds market."

This would decrease the interest rate, making credit more attractive. Then, more people and firms would use credit. Credit is a market like anything else and will always bring itself back to equilibrium.

Answer 7

the yankee dream has purely become approximately self, and we've forgotten that it could be approximately one yet another. yet to no longer subject which will quickly replace as quickly as issues get lower back on course and issues are finally dispensed the two among all. i in my view predicted the financial device fall down in the past everybody, the nighttime that Bush stole the election from Gore and grew to become president.

Answer 8

Well quite simply, you wouldn't have a 1: mortgage 2: Credit Card - don't be foolish, that will Never Happen. How would we run the country? Who would pay for this War? Merry Christmas!

Answer 9

Obviosly, the way we're spending money they way we do now a days.....