By Sasha Agapiev
A message to my fellow American Citizens:
As the worldwide bubble we have been inflating for the past seven years slowly begins to deflate and history begins to repeat itself, the many who have been living seemingly perfect, credit-fueled lives will have to face harsh realizations. Homeowners whose properties have seen prices increase like never before will soon discover the consequences of near-negative interest rates imposed by the Federal Reserve, and those who purchased cars worth more than suburban neighborhoods with artificial money will have to go back to living with their Honda Civics.
The fact of the matter is that this has happened before. This is not the first time when stock price inflation, low interest rates, and rising house prices created an unsustainable bubble which encouraged nonsensical spending. It’s not that difficult to understand. Bubbles don’t last, they have to pop in the end and bring everyone down to earth.
We can not continue ignoring previous incidents and telling ourselves that such things can’t possibly happen again. For growth to occur, we must learn from our mistakes and change our actions accordingly to benefit ourselves in the future. So, today, I will be supplying you all with some helpful and possibly life-saving advice.
Credit– It’s like financial morphine; Extremely useful when you need it for something important, but when you use it when it’s not imperative, it becomes a substantial problem.
For example, if you have ambitions to create a startup or business of some sort but do not have the funds to do so, taking credit would be considered to be an understandable solution. However, if you want a $350,000 Ferrari or a $2 million house to show off to your friends but you are short on cash and want to take credit, then ask yourself this:
Do you really need that car? Or that house?
Yeah, most likely not.
Another common scenario involves people whose properties see massive price jumps. In bubbles, the mean house price generally goes up, meaning that this happens to almost everybody at some period in time. When this occurs, the proprietor thinks to himself:
“Hey, this is kinda cool. Since my house costs $500,000 and the price keeps rising, I guess that means I can go get a loan for $300,000 and I’ll be able to repay it easily.”
The problem is that these people forget to take into account the possibility of a sudden devaluation, in which case they would still have to repay the principal borrowed plus interest but with a property that is worth less than before.
When the world around you is buying and spending like never before, it becomes tempting to join the crowd, especially when interest rates are practically at 0% (or negative in some countries). And spending can be good, but just remember what happened in 2008. And 2000. And 1987. And 1929.
Everything is perfect, until it isn’t.
Image Credit: Wikimedia