Developing Countries Emulate The U.S., Turn Citizens Into Debt Slaves - John Rubino

One of the big advantages of being a Latin American or Asian country used to be — somewhat counter-intuitively — the lack of credit available to most citizens. The banking system in, say, Brazil or Thailand simply wasn’t “advanced” enough to offer credit card, auto, or mortgage loans on a scale sufficient to turn the locals into US-style debt slaves.

But that, alas, is changing as those countries adopt their rich cousins’ worst habits.

Brazil, for instance, was once seen as a Latin American success story and future world power. But then it ramped up government spending and started encouraging its people to become “consumers.” And the rest is familiar, if depressing, history.

The following article is from 2015, about the Brazilian government’s response to its suddenly-overleveraged middle class:

Brazil Gives Borrowers With Record Debt a Lifeline: More Credit

(Bloomberg) – Brazilian household debt has swelled to a record. The government has a way to help: Payday lending.

Brazilian President Dilma Rousseff signed a decree this month making it easier to use payday loans from banks to refinance credit cards. In the U.S., the credit lines have earned a bad rap for high fees and shady marketing, but in Brazil they let borrowers cut interest rates by two-thirds.

That doesn’t mean the rates are low — at least not by global standards. In the U.S., credit cards charge an average of about 15 percent a year. In Brazil — where formal credit is still a relatively new concept for much of the population — consumers pay 85 percent for cards and 27 percent for payday loans, the central bank says.

Rousseff, in a presidential decree on July 13, ordered payday lenders to let borrowers tap credit lines equal to as much as 35 percent of their monthly incomes, up from 30 percent previously. That follows a September decree lengthening the maximum maturity on the loans to 72 months from 60 months.

Heavy Debt Burden

Ratcheting up what for many is a credit line of last resort underscores just how heavy the debt burden has become for many Brazilians. As unemployment rises and interest rates climb, rising household debt threatens to exacerbate the downturn in an economy that’s already on course for its worst recession in a quarter century.

For Brazilian banks, payroll lending — or “consignado” in Portuguese — are generally considered among the least risky lines of credit because they are paid back through direct deposit from borrowers’ salaries, said Gilberto Tonello, an analyst at Grupo Bursatil Mexicano.

Brazilian household debt as a percentage of disposable income swelled to 46.3 percent in April, the highest since at least 2005 when the central bank started tracking the data.

While the increase in payday lending may help reduce debt in the short-term, it’s likely some consumers will use it to refinance higher-interest liabilities and then run up their credit-card bills again, according to Moody’s Investor Service.

Since the above article was written, Brazil is fallen into a capital “D” Depression, with no end in sight.

And now it’s China’s turn to emulate the US:

Chinese consumers, once averse to debt, embrace credit to stoke car sales

(Auto News) – Chinese households, traditional savers with an aversion to debt, are rapidly warming to the idea of borrowing to buy a car, as automakers push financing deals to boost sales and margins in an increasingly competitive market.

Nearly 30 percent of Chinese car buyers bought on credit last year, up from 18 percent in 2013, according to analysts from Sanford C. Bernstein and Deloitte, helping a rebound in the car market after a sticky 2015.

“I’d estimate after the manufacturer came out with the low-interest deal that about 30 percent of potential cash buyers switched to buying on credit,” said a salesman at a Volkswagen dealership in eastern China’s Jiangsu province who gave his name as Mr. Zhao.

That is still a far cry from the more than 80 percent of cars bought on loans in the United States, but Deloitte predicts China will reach 50 percent by 2020.

Global automakers have struggled to encourage this trend for some time; Volkswagen established its finance subsidiary in 2004, but was held back by strict regulations on underwriting loans and sources of funding.

As the government gradually relaxed those restrictions over the last seven or eight years, financed purchases have grown, with Daimler’s Mercedes saying more than 30 percent of its cars in China are now bought on credit, and it reported 31 percent year-on-year growth in net lending as of the end of July.

The sad thing about this is that most mainstream economists see the creation of a borrow-and-spend consuming class as a good thing, a signpost on the journey from primitive cash-and-carry society to a modern one with credit-based money.

They’re wrong of course. But finding this out will involve immense pain for a whole generation of people who would have been a lot better off saving rather than borrowing to buy cars and houses.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.