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Americans Hold Over $4.1T in Consumer Debt

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Re: Americans Hold Over $4.1T in Consumer Debt

#111

Post by AnthonyMouse »

thechao wrote: post #84
adventured wrote: post #79

Earlier quoted context omitted.

Where isn't that true in the developed world currently? Very few places. Take a look at the extreme household debt to income ratios in Denmark, Sweden, Canada, etc. Look at the completely collapsed savings rate in Japan (stacked against their catastrophic budget / public debt situation that demands ever greater funding, while the economy has near zero spare taxing capacity). Japan has seen their real standard of livi…

But why? Is there anyplace to read about this?

A large part of the problem is that the international financial industry has entirely too much quiet political power. So we end up e.g. subsidizing mortgage interest and student loan interest instead of subsidizing e.g. new housing construction and teacher salaries. The result is that people borrow more money, creating much greater exposure to interest rate fluctuations (but much higher profits for lenders).

Other countries don't have exactly the same policies but they follow the same trend. Income taxes rather than consumption taxes that encourage spending/borrowing and discourage savings, sold as "the rich wouldn't pay consumption taxes" even though they don't pay income taxes either, examples abound.

Re: Americans Hold Over $4.1T in Consumer Debt

#112

Post by snowwrestler »

uiri wrote: post #72
cylinder wrote: post #63

Earlier quoted context omitted.

The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up to the price of the degree, then it is an "upside down investment" just like a house with negative equity.

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not grea…

When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere).

For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Voila: the power of leverage.

> The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate.

I'm not aware of any evidence that this is true. What we know is that on average, folks with college education earn more over their lifetimes than those without. I've never seen any sort of reporting that degrees depreciate "right off the lot" like cars.

Anecdotally I'll point out that most people list their college education on their resumes for their entire careers. And my employer calls the university to verify a degree on a resume before extending an offer--no matter how long ago it was received.

And that's just the paper; it doesn't even account for the value of the actual education itself to a career.

Re: Americans Hold Over $4.1T in Consumer Debt

#113

Post by FullMtlAlcoholc »

ericd wrote: post #94
FullMtlAlcoholc wrote: post #93

Earlier quoted context omitted.

> convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-avers…

Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.

I completely agree. A bird in hand is worth 2 in the bush and all that. However, even today economic theories do not take this into account and assume rationality === choosing the highest expected payoff. I.E. we're all statistical savants

Re: Americans Hold Over $4.1T in Consumer Debt

#114

Post by milesvp »

uiri wrote: post #80
curtis wrote: post #74

Earlier quoted context omitted.

> A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Most people who own homes only own the one they live in. If they did not own that home they would have to pay rent. So to figure out the overall value of the investment, you'd need to add up not just all the money it's going to cost the owner, but also subtract all the money the the owner…

Let's say we have two individuals - Alice and Bob - who each own a house. Each house has the same price on the real estate and on the rental markets. If Alice lives in Bob's house and pays rent to Bob and Bob lives in Alice's house and pays rent to Alice, their balance sheets are the same as if Alice lived in her own house and Bob lived in his own house. Excluding the rent income and rent expense (which offset), thei…

This only works in some magical tax depreciation scheme. In reality, monthly mortgage costs in an area are going to be market driven as are rental prices for the exact same property, and while the two axis aren't completely orthogonal they are somewhat independent. My experience is that in any given year in most regions rent income will not cover house payments/taxes/upkeep without tying up absurd amounts of down payment. I finally bought the house I was renting and my mortgage alone is more than I was paying in rent. Only reason I did it was that it was a long term hedge on the 10% rent increases in my region that I'd been seeing and expecting for another few years at least. I'll let you know if it was a smart play in 30 years...

Re: Americans Hold Over $4.1T in Consumer Debt

#115

Post by AnthonyMouse »

uiri wrote: post #72
cylinder wrote: post #63

Earlier quoted context omitted.

The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up to the price of the degree, then it is an "upside down investment" just like a house with negative equity.

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not grea…

> Housing prices track inflation.

The problem is they don't. Especially in urban areas, housing prices have historically risen faster than inflation, leading to the absurd prices and rents we now see in many cities.

This has created a bit of a crisis now, because many people have bought housing expecting it to continue to beat inflation, but the prices are already absurdly high and further significant increases are unsustainable.

The result is that housing was an investment, and might continue to be for a few more years as long as the vested interests can continue to inflate the bubble, but at some point there is a pop coming.

Re: Americans Hold Over $4.1T in Consumer Debt

#116

Post by cardiffspaceman »

uiri wrote: post #72
cylinder wrote: post #63

Earlier quoted context omitted.

The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up to the price of the degree, then it is an "upside down investment" just like a house with negative equity.

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not grea…

> An investment is an asset which is expected to go up in value faster than inflation.

An investment isn't defined away because it is likely to fail. It can be a bad investment if that is the probability.

An investment isn't in general defined by wisdom.

Stocks have been invested in when inflation was high enough to make them bad investments in the short term, but in some such cases they worked out in the long term.

Re: Americans Hold Over $4.1T in Consumer Debt

#117

Post by tradersam »

adventured wrote: post #76
omilu wrote: post #2

Combine low wages, increasing loan delinquency, and the probable start of trade wars with mexico and china and I can't see how this doesn't turn out to be like 2008 on steroids.

Low wages? The US has among the highest wages on the planet. To go with nearly the highest GDP per capita and nearly the highest disposable income levels. The US has higher wages than: the UK, Germany, France, Sweden, the Netherlands, Finland, Austria, Belgium, Spain, Portugal, Japan, Taiwan, South Korea.

True, but considering with that high income no education assistance, medical insurance, or job-loss insurance, you can easily half the average income and then see actual disposable income.

Re: Americans Hold Over $4.1T in Consumer Debt

#118

Post by coliveira »

FullMtlAlcoholc wrote: post #93
Shivetya wrote: post #78

Earlier quoted context omitted.

A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed and convince otherwise rational people to make an irrational decision which has them take on more debt. from buying too much house or car to over buying an education that cannot be used where the person is or in a field that cannot withstand the costs. all of t…

> convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-avers…

You answer to question A is true only if this is a repeatable event. If you have only a one-time decision to make, the logical answer is to take the money and run.

Re: Americans Hold Over $4.1T in Consumer Debt

#119

Post by specialist »

Shivetya wrote: post #78
cylinder wrote: post #60

Earlier quoted context omitted.

Looking at principal balances is all wrong. GDP means nothing in this instance either. What matters, and what lenders look at, is debt serviceability. Lenders don't want principal paid back, ideally you just keep paying interest for life. Let's say median household: Income: $4000/mo Rent: $1500/mo Other necessities: $2000/mo Let's say $500/mo "disposable." It's from this that the interest needs to be paid to service…

A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed and convince otherwise rational people to make an irrational decision which has them take on more debt. from buying too much house or car to over buying an education that cannot be used where the person is or in a field that cannot withstand the costs. all of t…

"A large amount of individual debt is wholly optional."

And a lot isn't.

Apart from my mortgage, ALL of my debt is accrued when I'm too sick to work, and the medical bills pile up.

Some huge fraction (1/3?, 1/2?) of bankruptcies are caused by medical related expenses.

Re: Americans Hold Over $4.1T in Consumer Debt

#120

Post by coliveira »

adventured wrote: post #79
dpweb wrote: post #52

Earlier quoted context omitted.

The important thing really is the financial fragility of the American household. Millions of people know that they are one unexpected event away from insolvency. GDP doesn't mean anything to them. Consumer debt just puts them more at risk.

Where isn't that true in the developed world currently? Very few places. Take a look at the extreme household debt to income ratios in Denmark, Sweden, Canada, etc. Look at the completely collapsed savings rate in Japan (stacked against their catastrophic budget / public debt situation that demands ever greater funding, while the economy has near zero spare taxing capacity). Japan has seen their real standard of livi…

The difference is that in the US there little social support for people who lost their jobs. Even employed people have a comparable lower standard of life, because there are so many social services available in Eastern EU countries not available in the US. Just for the biggest example, consider that Americans have no public option for health care, so if they lose a job their lives are at risk.
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