Wednesday, May 20, 2015

Good credit vs Bad Credit

The worst credit is what the U.S. has, which is consumer credit. People borrow to buy a car or a washing machine. That does not generate income and becomes burdensome to the household.

If you look at Korea and Japan in the 1950's to 1970's, credit was used for capital spending, infrastructure, plants, education, research and development. That credit generates cash flow, which can repay the debt.

Some people argue that China has overbuilt roads, tunnels, bridges and trains. But I don’t see it that way. In the U.S. during the 19th century, the country constructed lots of canals and railroads. All the canal companies, including the Erie Canal, went bankrupt. About 95% of the railroads had to be refinanced or went bankrupt. But the network facilitated the country’s trade and commerce significantly. So China is doing the right thing.