High Income Nation 2

Artificial Buying Power

8. Loans are the most accessible form of artificial buying power. Literally, no hard cash is required upfront to strengthen a particular demand. Banks use the savings of their clients to lend money. This saves a lot of headaches to the government.

9. In car market, for example, not many people can actually afford a car. Most people are dependant on car loans. Due to the availability of loans, car market gains strength. Industry players make profits. Proton was able to build its factory in Tanjung Malim (costing about RM1.7 billion) without any financing.

10. The same applies to housing market, save those which were mismanaged.

11. However, excessive distribution of loans is hazardous. On top of the actual price, consumers pay interest. The total price is inflated. This amount is spread over a considerably long period in which a portion of monthly salary is deducted. To a borrower, this portion could no longer be utilised to purchase new products. His actual buying power is now reduced for years (the duration of the loan) although a fair amount of income may still appear on his pay slip.

12. With debts in hand, the moderate and lower income people, who are the majority, would be left with limited buying power. Unless there is a widespread pay increase or there are loans which have loose requirements, the market will foresee diminishing demand for new products. This is not good for the economy.      

13. The general market could not survive on the rich minority alone. Therefore, a widespread pay increase or the offering of easy loans must be carried out.

14. In Malaysia, this is happening in front of our very eyes. We are seeing people with long term debts, we are seeing widespread pay increases and we are seeing the availability of easy loans. Those with debts can borrow more. If not careful, they would plunge themselves into series of debts.

15. Being confident of the ability of consumers to pay (through loans), industry players raise their prices. Again, adding interest charged by the banks, the prices become much higher.

16. These are bubbles. And the market will be saturated with bubbles. There will be time when a large number of borrowers fail to settle their installments. The time when the market collapse.

17. But some economists are denying the existence of bubbles in our market.

* This is also posted on Tun Dr Mahathir's blog under Minimum Pay