This credit crisis...

Each time you listen to the news now, people are talking about the global financial crisis we are in: the US financial meltdown and the domino effect to the rest of the world. Iceland declared bankruptcy...Companies all over the world letting go of thousands of employees for cost-cutting measures, consumers keeping their cash in their pockets so in effect reduced sales and lower margins for manufacturing companies, etc etc etc

Others say we are in the brink of a global recession, others contest that we are already "in" a recession. But how did this happen???
Well, this credit crisis which started in 2007 is said to have started from the US's housing bubble:

"The Financial crisis of 2007–2008 initially referred to in the media as a "credit crunch" or "credit crisis", began in August 2007, when a loss of confidence by investors in the value of "securitized" mortgages in the United States resulted in a liquidity crisis which prompted a substantial injection of capital into financial markets by the United States Federal Reserve and the European Central Bank.The TED spread, an indicator of perceived credit risk in the general economy, spiked up in August 2007, remained volatile for a year, then spiked even higher in September 2008.Although America's housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and over-leveraged financial contracts and operations, a US monetary policy making the cost of credit negligible therefore encouraging such over-leverage, and generally an hypertrophy of the financial sphere." (More info here)

I think, this cartoon strip gives a better explanation sans the economic parlance:

*Courtesy of http://bigpicture.typepad.com/photos/uncategorized/2008/10/27/sevendeadlysins1.gif

Anyways, I was in one of those profound (oh the usual, he3x) conversations yesterday with a Dutch and French colleague; and the American consumerism culture was also discussed; its economic system majorly driven by its consumers ."As long as Americans kept buying, America's economic engine just kept turning.-Geoff Colvin,Fortune"... It is quite a well-know fact, that the Dutch and other Western European countries are the polar-opposites of Americans on financial matters. The Dutch (as well as the French) have a strongly "debt-averse" culture and the only thing they consider as acceptable to "owe" is their mortgage; as much as possible they buy everything in cash. A "need-to-buy" basis: if you still don't have the money to pay for it, then don't buy it...if your current television, still perfectly works, don't buy a new one. Goed idee!
(*I have observed that the Dutch only splurge on these: HOLIDAYS, HOME,...and HOLIDAY HOMES. We have one manager who drove a science-project-of-a-car, but, has a holiday home in France. "Why buy a new car, when this one still perfectly works"...BUT, when the car finally reached its lifespan (in fact due to a road-accident), he bought a car the next day, in... cash!)

So perhaps, now is the time, to "go Dutch" and be more frugal?

Anyway, from the Professor's House : "Tips on How Not to Live on Credit

Eliminating credit is possible, but if you’ve been a shopaholic for a long time, it will take truckloads of military-like discipline to stop your frivolous spending. We’ll provide some tips on how you can wean yourself away from plastic:

• throw those credit cards that land in your mailbox. You don’t need more than two;
• prepare a grocery list before heading for the supermarket. You tend to buy more without a list. Create a meal plan for the week ahead and then create your grocery list based on that meal plan. A related tip: buy only those ingredients that you can use over and over again. One time we cooked a Lebanese dish that required the spice cumin. We used a pinch of it and it remained untouched for the next two years!
  
• avoid impulse buying by asking yourself three times: “do I really need this?”
  
• don’t be fooled by department store sales: 30% off is not a great deal, especially if you don’t need the item in the first place!
• pay off your credit cards with the highest interest rates. Do not use them again until you’ve paid off the entire balance due
• stop imitating the Joneses. If they have a fancy GPS in their car, you can do without it;
• save a fixed amount from your salary every two weeks/month. This can be done consistently if you arrange with your bank to automatically deduct this from your paycheck;
• instead of leaving loose change around your house, gather them up and put them into a piggy bank. Now, don’t go running to the store to buy a piggy bank. You can use an old cookie jar to store all your loose change. When it’s full, take it to the bank;
• buy generic. Most supermarkets have their own products – flour, sugar, soap and detergent, jam, bread, bottled water, soda, baking products, spices, etc.
• develop the habit of paying cash for your day-to-day purchases: gas, toiletries, dry cleaners, medication, cosmetics, lunch and dinner (it’s better to make a home cooked meal actually);
• reduce the frequency of dining out (in an article entitled “Why we Buy” published in Report on Business Magazine in January 2000, the writer said that “the average Canadian household spends $112 weekly on food, and more than a quarter of that is spent in restaurants”)
• rent a movie and pop your own corn instead of going to the movie house and buying a ridiculously-priced bag of popcorn!

Why Live on Credit?

There are many reasons why people live on credit:

• to fulfill an insatiable desire for material goods;
• to keep up with the Joneses;
• to give in to their children’s spending habits (kids nowadays have a propensity for buying only the most expensive brand names)
• to consider shopping as therapy – they “treat” themselves so they can feel better about themselves
• to borrow easy money at generous terms – so generous that people find it difficult to say NO!
• to be a frivolous consumer (modern society has created millions of artificial needs convincing consumers that certain products are a “must have.”)

Living on credit? Don’t be just any other consumer. Be an enlightened consumer and start paying cash! "

*From Sinfest

A related news article from TIMESONLINE --> here.