You recognize the old familiar feeling; the bitter taste in your mouth, the dryness in your throat, the rag-like texture of your tongue. Pale and shaky, you sit down slowly, staring at the evidence of what you obviously did but can hardly remember. Hung over after a wild party? Kind of. In cold, merciless font, January’s credit card statements present you the hefty bill for December’s shopping spree. You have the post-holiday spending blues. The rest of us have got it too.
Statistics Canada reveals the concern that Canadians owe about $1.65 for every $1 they earn; many will never pay their bills off. How did we get ourselves in this hole? Simple. Take, for example, Dec. 24, when shoppers came out in full force. Canada’s largest credit card processor, Moneris, processed a record 453 transactions per second between 2:20 and 2:25 p.m. EST — any of them yours, you think?
Plastic makes it easy to spend money; we can walk around with a lot of power in our wallet. “It can be tens, even hundreds of thousands of dollars worth of purchasing power that you’d never carry if you just had cash,” Visa Canada economist Tom Hester remarks. From 2006 to 2010, the number of card transactions in the country grew 25 per cent. But guess what? Average consumer debt grew at the same frantic pace, and now, a tag of $26,700 hangs tightly around the equally average neck.
But how to resist the urge? All those things we didn’t get at Christmas are now on sale! Succumbing to the temptation of spending some more, we dig ourselves deeper into the ever-widening hole. Not to worry, though; there’s financial muscle out there to keep your powerful wallet alive and well. Coming to your aid in January every year, banks’ brochures look like they just came out of the printer. Their solution portfolio is awe-inspiring, but it all boils down to one simple, basic approach: “may we suggest a… LOAN?”
The magic word. I can almost hear Henry Ford shuffling in his grave; “It’s well enough that people (…) don’t understand our banking and monetary system, for if they did, (…) there’d be a revolution by tomorrow morning,” he said.
When it comes to offering loans, banks’ reserves seem limitless, and in a way they are, because banks can create money in the blink of an eye. Say I deposit $10,000 into my account: Only $1,000 stays in the bank’s vaults; the rest is offered to you as a much-needed loan. You use $9,000 to pay for your new car, and the seller takes his/her gain straight to his/her own bank. Treated as a new deposit, 10 per cent of my $9,000 stays in this bank’s vaults; the rest ($8,100) is loaned out once more. This process is repeated until, in the end, my $10,000 have multiplied by 10 — the banking system has created $90,000 by loaning out my money again and again. And if I ask for it back? Will it be there? Since it’s been loaned out, I’ll likely have to wait. Things could easily fall apart if we all wanted our savings back at the same time.
The theory of banking practice says this could never be the case — the first bankers, goldsmiths in 17th-century Cheapside, England, knew it well. The receipts they gave out when storing people’s valuables became our current bank notes. Realizing not many people would withdraw their gold at once, they started creating receipts for more metals than they had. The interests they charged earned them great wealth — yesterday and today, this is ingenious alchemy at work!
Since then, at the end of a long day, we barely manage to cover our loans’ interest rates. Still, the banking system’s modus operandi is no justification for irresponsible behaviour. Spending within our means is already a good step towards freeing ourselves of debt, and who knows what happens next. The path for the revolution will be cleared, and then…