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The other day, a good friend of mine was telling me about how his six-year-old, is very interested in money.

He’s always asking how much he needs to save to purchase some random big-ticket item.

And if he notices somebody using their money to purchase something, he remarks that they should have saved that money, and waited to purchase something even better.

I am fascinated by this.

First, because I’ve been trying to educate my kids about money, and anything I tell them goes in one ear, and out the other.

But also, because it got me thinking, should we be teaching our kids the same strategies as what was taught to us, when it comes to money?

Is it going to be sufficient to teach them to just spend less than they make, and then take those savings and invest them?

I’m not so sure it works that way anymore…

I don’t believe the economy as a whole, works that way anymore…

The whole concept of capitalism was that businesses would invest, and some would make a profit and would accumulate those profits as capital, and then they would invest that capital again.

Essentially, it was invest, save, invest, save…

This is the formula behind capitalism.

But this is not really how it works anymore.

Our economic system today is not driven by savings and investment, it is driven by credit creation and consumption.

Credit is what drives economic growth.

What do I mean by that? Take real estate investors for example…

Without access to mortgages (i.e. credit), not many investors would be able to own multiple properties.

Even at lower housing prices, it would take a long time to accumulate enough surplus rental income to purchase an additional rental property.

But with the magic of credit, an investor only needs to accumulate 25% of the cost to purchase that next property, and then they can borrow the rest.

Or better yet, if the first house has increased in value, they can also borrow against that increased value and potentially get up to 100% financing for the purchase of the new rental.

That is the magic of credit.  And it doesn’t apply to only real estate.

This is pretty much how every industry grows in our modern economy.

And unfortunately, without credit growth, we go into a recession.

And worse, if credit contracts, we go into a depression.

If somebody were to look at a chart that goes back to the early 1900’s, only once has credit contracted…

And that was in the 1930’s. The era of the Great Depression.

Basically, Capitalism has transformed into Credit-ism.

And if that’s true, then it should provide some insight into what will happen in the future with interest rates and real estate markets.

At today’s interest rates, credit is not growing. And not surprising, that most industries aren’t growing either…

And if we know we need credit growth… the question becomes… when does credit begin to grow again? Asked a different way… when do interest rates go down?

Not to say that things can’t get uglier before they get better, but inevitably credit growth in the economy will continue at some point soon and to achieve that growth, rates will have to come down.

All the best,

P.S. Think my kids will be receptive to me teaching them about Credit-ism?? Lol. My buddy’s kid might be…