by Michael Greaney

Created on: June 17, 2009

The problem of credit in the modern economy is not whether there is too much credit or too little. The basic issue is what kind of credit are we talking about. There are, in fact, two kinds of credit.

The Bad Kind of Credit

Unfortunately, what most people mean by credit is consumer credit. This is "bad" credit. In order to obtain consumer credit, you have to promise to repay whatever you borrow out of income that you earn doing something else. No one (ordinarily) pays you for buying food or gas or anything else. Having dinner or driving your car (unless you are a cab driver doing it to make a living) does not generate income. Having dinner or driving your car falls into the category of consumption.

Thus, engaging in consumption means that you are not making money. Consuming does not generate the income necessary to be able to engage in consumption. Consumption is therefore "non-productive," and does not, by its nature, provide the means to repay any money borrowed in order to engage in consumption.

There is more bad news with respect to consumer credit. Unless you can be absolutely assured that your income will increase by enough to repay your consumer debt and meet all your future consumption needs, your future consumption will have to be reduced in order to repay the loan or credit card.

This is inherently a losing proposition. If you had enough income to meet your current consumption wants and needs, you wouldn't have borrowed in the first place. If your income doesn't increase (and whose does, nowadays?), you have to reduce future consumption in order to repay what you borrowed. This means that you must then borrow again in order to make up for the income you spent paying for the previous loan(s), plus whatever interest is charged, reducing your ability to consume even further. You get into the trap of trying to spend your way out of debt, all the while only getting in deeper and deeper.

Many people, in fact, get consumer credit in order to repay a previous loan, then go out and use additional consumer credit to meet their living needs. At some point this catches up to them, and they end up bankrupt. This is why consumer credit must be considered bad credit, and any amount of bad credit is too much. Like the case with an alcoholic, a million dollars in consumer credit is not enough, and one dollar is too much.

The Good Kind of Credit

In contrast to consumer credit is capital credit, that is, credit that is used to finance an investment that pays

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