Credit Card eZine - News and Articles about Credit Cards

Stock Market Fall Prospects

Wednesday, January 23, 2008

In fact, crisis trends within American economy became apparent long ago. But if we want to understand the causes of this crisis we need to know how economy works. The main principle here is Credit. Everything works on the basis of credit. Production and economic growth depend on credit investments. The necessity of recoupment of capital investments pushes business to search and open new market areas. Thus credit investment style needs more and more consumers.

Modern U.S. economy clearly absorbs resources of all available consumers. Having made rapid advance after USSR dissolution (together with establishing of a new market zone) national credit organizations began to issue an enormous number of credits for any purposes.

The nineties became the first stage of modern crisis. Business constantly offered new goods and created new needs by means of endless advertising. As a result many Americans used their credit cards to pay for their expensive daily purchases instead of saving and paying their mortgage loans.

What Do the Bankers Think?

Our credit system is very speculative. A client comes to a mortgage lender and asks for home loan. The client gets a loan. Then a new person comes with the same request, but the lender cannot issue a credit because he lacks available assets. In this case this "second" client takes a pawn ticket of the first one, and then remortgages it somewhere (in another bank for example). He gets his money. By the end this pawn ticket would be remortgaged many times.

Mortgage lenders were self-confident enough to think they would make their profit endlessly. But suddenly (in the most recent years) overestimated house prices began to fall down. Construction companies shorten their building projects.

Lenders found themselves under the threat of liquidity slump. The biggest part of U.S. debt issues is unendowed (even so banks continue to issue new bonds). As the result the aggregate U.S. debt (including the National one) is more than $ 50 trillions. To cover such debt we need to quadruple our GDP and then spend it all. This total debt has more than 10% of yearly growth, while the economy growth level is only around 2%.

FRS Solution

However the system cannot be stopped and credit issuing continues. The biggest part of new credits is used to refinance the old ones. That's why banks constantly urge FRS to revise Fed rate (it was 4.25%) towards further declension. New declension of this rate was made on January 22 - the new fed rate is 3.5%.

Together with fed rate cut FRS intends to print new cash that will inevitably increase inflation. Possible inflation level will be 8% or even higher. The easiest way to prevent this inflation is to increase fed rate, but as we see it cannot be done.

President G. Bush has recently disclosed some concepts of his Budget 2008 recovery plan. Among his plans we can find the intention to reduce taxes and to freeze the mortgage rates on their current level in the nearest five years. But it's hard to say whether it will be effective, particularly in case of coming elections.

Global market shows numerous bankers who refuse to lend each other. Euro Zone works with its own rate cuts. Chinese market declares that it has no desire to defray expenses of American economy. Japan is glad to help but it has its own problems. Foreign entrepreneurs rush to buy up cheap real estate.

Personal Finance

Fed rate cut may strongly help business to launch financial engine by the means of "light" business credit, but it is not about individual borrowings. Credit scoring agencies like Trans Union revise their calculations in order to shift the borders of bad, good and excellent scores towards hardening of tolerance requirements. If you have a score of 650 than you need to get 680 if you want to apply for a card with the same terms.

In total, getting approved for credit cards now seems to be quite difficult, but it can become even more difficult in a month. As soon as FRS revises its rate, than lenders income may fall. In order to prevent the problem they will largely increase the fees. However, right now these fees are the same.

So, if you apply online immediately you get quite profitable terms with expected low APR and current acceptable fees. Hurry up and apply today.