• A strangled cash economy

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    MIKE WOOTTON

    MIKE WOOTTON

    There is no question that you can learn a lot by trawling around the internet. My latest amazing discovery was in the area of how long it takes to pay off credit card debts. A UK site posed the question “how long would it take to pay off a debt of £2,000.00 [P140,733] if you just paid the minimum amount every month?” They used an assumed interest rate of 18 percent a year. The answer is 34 years! After which, if you were still alive, you would have paid 300 percent of the original debt.

    Credit card interest rates in the Philippines run at between 3 and 4 percent a month [36-48 percent a year] over twice the rate used in the example above. I haven’t worked it out but I would guess that to pay off the P140,000 here would take much longer than the average lifetime. This makes for a ridiculous situation that banks will levy credit card interest rates, which, on the basis of the minimum monthly payment, are simply not repayable. Why you have to wonder would anybody do that, give people loan facilities that were knowingly unrepayable? I can only assume that they don’t really care whether the principal amounts are repaid or not, they get their interest, however much can actually be paid back before the debtor dies, and that is enough.

    LIBOR—the London Interbank Offered Rate—is a benchmark interest rate for what banks charge each other for short-term loans. It is used as a reference internationally. The current rate is less than 1 percent, even for loans of up to 12 months. So your friendly credit card provider can get money from other banks at an interest rate of less than 1 percent per year and then loan it out to you, supporting a credit card at 36-48 percent a year. There are certainly loads of money to be made. It is a disgrace.

    In the Philippines you can borrow money to buy a house [at a special low interest rate for valued customers, I noticed at the bank today, of 4.99 percent], a car, or they will give you a credit card. Unsecured personal loans or business loans do not really exist. So this results in a cash economy in which retailers cannot afford to carry too much in the way of stocks, because they cannot finance the stockholding, and for almost everything, it is necessary to pay in advance as smaller organizations do not have the working capital to extend any credit at all to customers. It is no wonder that nothing advances very far or very fast in the way of new development other than by the oligarchs who, in any event, own the banks that charge the usurious interest rates.

    It’s not too difficult to imagine that if the Philippines wants to move its economy ahead, the central bank should do something about consumer interest rates, rather perhaps than focusing on the imaginary benefit of amassing foreign exchange reserves and other financial engineering feats to amass money in the GFIs [Government Financial Institutions], Landbank, Development Bank of the Philippines and the Treasury, that can be bureaucratically held up for eons before it can be put to any meaningful use in economic development. “Government is very financially strong, it has loads of reserves”. It reminds me of a Hong Kong comedy series in which the endlessly mahjong playing wife wins the lottery and many millions of Hong Kong dollars.

    After her win, every so often she takes her mahjong-playing friends to the bank, gets the bank people to wheel out a massive trolley stacked with money for the ladies to look at for a few minutes before it is wheeled back into the vault.

    Money in the Philippines appears to remain in the government financial system gaining sovereign credit rating upgrades, or it remains in the hands of the oligarchs and, make no mistake, there is a lot of it around. So no wonder that there are so many holes in the roads, that people die on the hospital steps because they can’t pay the essential cash deposit, or that the education system requires children to have classes at 5:00 in the morning, that so many people live on the street, or that the ordinary people never seem to have enough money. It’s all locked up. But then there are a lot of shiny new cars on the roads, some people do buy houses and, of course, consumerism is alive and well and the 36-48 percent interest rate credit cards are flashed endlessly in the ever growing number of shopping malls transferring purchasing power from ordinary mortals to the oligarchs and showing a “fast developing consumer based economy”!

    A quote from Nelson Mandela: Money won’t create success, the freedom to make it will. The freedom to make it is what is missing here and sits alongside the other well-known adage, “you gotta spend money to make money”, sitting and looking at it is worthless other than, perhaps, in the terms of sovereign credit rating analysts.

    Finally, if any reader wants to shock themselves with the unknown enormity of their credit card obligations, have a look at this link, and then you will get a rough idea how much you are paying for the banks wonderful customer “service“ —http://www.independent.co.uk/money/do-you-know-how-long-it-takes-to-pay-off-a-2000-balance-on-a-credit-card-10353233.html

    Mike can be contacted at mawootton@gmail.com

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    3 Comments

    1. “you gotta spend money to make money”, sitting and looking at it is worthless other than, perhaps, in the terms of sovereign credit rating analysts…”
      ______________________

      Gotta show this to the Aquino administration which loves bragging about its sovereign credit rating as proof of a robust economy.

    2. Amnata Pundit on

      The banks don’t care about the principal as much as they do the interest because the money they lent out- the principal- is money created out of thin air. It is only a digital or accounting entry in their books, but what you pay them came from your blood, sweat and tears. That is the magic power of banks, a power given to them by law. Its called fractional banking, and if you research this topic you will discover that it is a Ponzi scheme. This century old scam by the way is unraveling big time, and this is evident in the financial crisis now plaguing the West, more specifically, the U.S., Japan and Europe where they are saddled with debts that are mathematically impossible to pay. Watch Greece closely, it will be be followed by other countries starting most likely with Portugal.

    3. arthur keefe on

      Even worse when we consider the huge industry of money lenders who do offer unsecured loans, but at annual rates of interest of hundreds of % points.It is mainly the poor who use these loan sharks, often to pay medical bills or school costs. These are the biggest disgrace.