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I agree... but the chunk of people getting hit with no fault of their own is getting larger. At some point, if it hasn't already it hits everybody... even through devaluation of currency or taxation.
Honestly, I don't know anybody that has been "hit" that was innocent.
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Originally Posted by chuck22b
Doesn't make sense in a recession when the Real interest rates of debt are higher than the nominal rate.
And why is that? The real interest rate is what matters.
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Originally Posted by chuck22b
Also doesn't make sense if things are far too uncertain (ie, you go for education in X, but the field may be over saturated and won't pay as much as now, or may dissipate in the future, etc.).
Huh? Things are always uncertain. You can say this during good times as well as bad. The point is to take calculated risks.
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Originally Posted by chuck22b
I generally agree though with your statement. But not at the present moment.
Then you don't get it. The "present moment" does not matter. Either the debt makes sense or it does not. You use the same methods to evaluate that during a recession as you would during a boom. In fact, its almost the opposite of what you are saying! You're more than likely going to see more clearly during a recession than in the intoxication of a boom!
Here is what is funny. You are paying off debt, let me guess you built it during the boom? You were intoxicated. Now, you are going to shun debt when you are seeing more clearing. Of course, during the next boom you'll get intoxicated again.
Its like the people that sell stocks whenever they decline and then always buy back into the market after a large rally....often close to when its over!
I think people have reason to fear. When in U.S. history did we ever outsourse so many job to the point where is began to hurt the average worker? Since when did we give credit to people who had no way of paying it back just to keep the economy going?
hmm... if everybody's standard of living is going to drop (and in most intensive purposes drop for a long duration of time)... then? Wouldn't there be a large chunk of the middle class falling bellow the middle class threshold - into poverty/poor line? shifting = shrinking middle class?
Well I think you would have to clearly be able to define middle class. The people who have homes that are WAAY too big for them, have extra vehicles,loads of toys, etc. their standard of living will have to drop. I don't think that means middle class will go away. By living a simpler life they will have money to do other things, instead of throwing it all on a mortgage, car notes, etc.
I just feel like people have gotten so greedy over the years and are never satisfied, they blow their money on the dumbest things, they think short term, they don't plan for the future, etc. That caveman thinking has to change. These people will have to evolve or they will end up poor and blaming the government and will turn into non productive save me feed mes. I would rather be an innovator than a complainer.
We have all made mistakes and have gotten a little bit greedy, but its those of us who learn from those mistakes and evolve who will be better off in the future.
The world is pretty messed up, life is pretty messed up, all we can do is try and make the best of it.
Chuck,
Do me a favor and go to this link below and Tell me if you see anything wrong with this guys future planning. If not, I don't know what to tell you. This is the problem we are dealing with right now, people biting off WAAAAAAY more than they can chew. And then to top it off, they just walk away if it doesn't work out. This is whats killing us right now. Stupid people! This is someone who has been responsible in the past and is about to make a huge mistake (If the bank lets him).
And why is that? The real interest rate is what matters.
And that's my point. The Real interest rate is higher than the nominal interest rate when things are deflationary.
Real Interest = Nominal - Inflation
In a deflationary environment Real Interest rates are higher than nominal making debt more expensive than holding cash. If more defaults continue, and the money/credit supply contracts, then Real cost of debt would go up.
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Huh? Things are always uncertain. You can say this during good times as well as bad. The point is to take calculated risks.
Of course things are always uncertain, but things are currently more uncertain than they normally are hence all the "risk" premiums banks and other lenders are tacking on to borrowed money.
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Then you don't get it. The "present moment" does not matter. Either the debt makes sense or it does not. You use the same methods to evaluate that during a recession as you would during a boom. In fact, its almost the opposite of what you are saying! You're more than likely going to see more clearly during a recession than in the intoxication of a boom!
Of course it matters. Interest rates fluctuate and cost of debt varies and thus timing matters. Go ahead and take on debt if you like... it's your prerogative. If you don't have debt, then it may be a good time soon.
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Here is what is funny. You are paying off debt, let me guess you built it during the boom? You were intoxicated. Now, you are going to shun debt when you are seeing more clearing. Of course, during the next boom you'll get intoxicated again.
Its like the people that sell stocks whenever they decline and then always buy back into the market after a large rally....often close to when its over!
Actually working towards debt free at the personal level is probably good during a recession or an expansion as cost of debt is higher during a recession as everybody recedes and cash is cheap when things expand making paying off debt easier. Anyhow, it's all about your comfortable leverage level and positioning/posturing for future growth/expansion and the purpose of incurring debt.
Anyhow, your comment as mentioned above contradicts your previous point that the "present moment" does not matter when determining whether to incur debt.
If it doesn't matter, then incurring debt during the boom, or after during a bust wouldn't matter if it makes sense in either case. But clearly, you just demonstrated above that timing is key and weighs on the decision.
Chuck,
Do me a favor and go to this link below and Tell me if you see anything wrong with this guys future planning. If not, I don't know what to tell you. This is the problem we are dealing with right now, people biting off WAAAAAAY more than they can chew. And then to top it off, they just walk away if it doesn't work out. This is whats killing us right now. Stupid people! This is someone who has been responsible in the past and is about to make a huge mistake (If the bank lets him).
On face value I'd have to side with you and say that they're taking on way too much debt load. But, it really depends on their risk tolerance and how much "reserves/savings" they actually hold, the housing market in that location, their goal (sell in a couple years, stay for the long run, etc.), etc., etc.
Personally, I wouldn't do what they are thinking of doing because I am fairly conservative with my risk tolerance. But, if they see their market potentially rising, and have great future potential for increasing their personal incomes, child's education capital, etc., etc., then they are well positioned to capitalize on an appreciating asset or location that would benefit the whole family.
IMO, generally speaking, America's risk tolerance has gone up (because they believe their personal growth will continue to go up because they can be a statistical outlier - better than the mean). While in reality, America's potential for growth has gone down with an aging population, market maturity, etc.. At some point, America's appetite for risk needs to be aligned with America's maturity and aging production capacity.
Of course though, we are the youngest of the developed world... and we do have the youngest immigrant population so maybe there is some juice left
On face value I'd have to side with you and say that they're taking on way too much debt load. But, it really depends on their risk tolerance and how much "reserves/savings" they actually hold, the housing market in that location, their goal (sell in a couple years, stay for the long run, etc.), etc., etc.
Personally, I wouldn't do what they are thinking of doing because I am fairly conservative with my risk tolerance. But, if they see their market potentially rising, and have great future potential for increasing their personal incomes, child's education capital, etc., etc., then they are well positioned to capitalize on an appreciating asset or location that would benefit the whole family.
IMO, generally speaking, America's risk tolerance has gone up (because they believe their personal growth will continue to go up because they can be a statistical outlier - better than the mean). While in reality, America's potential for growth has gone down with an aging population, market maturity, etc.. At some point, America's appetite for risk needs to be aligned with America's maturity and aging production capacity.
Of course though, we are the youngest of the developed world... and we do have the youngest immigrant population so maybe there is some juice left
-chuck22b
Believe me, this guy is making a mistake. Just like millions of other people did.
After all of his bills he will have $500 left over per month if he is lucky. He is taking on way too much debt and will pay dearly unless he is VERY lucky.
They have big eyes and want to buy that DREAM HOME, just like the others before him. Being house poor is no fun....
Believe me, this guy is making a mistake. Just like millions of other people did.
After all of his bills he will have $500 left over per month if he is lucky. He is taking on way too much debt and will pay dearly unless he is VERY lucky.
They have big eyes and want to buy that DREAM HOME, just like the others before him. Being house poor is no fun....
I agree,
But without people like them, our economy goes nowhere. ***** if you do ***** if you don't. Without monetary expansion (people taking on debt), our economy contracts because aggregate production has been shrinking for a long time. The more the banks are able to push on credit worthy borrowers the better for the bank and the general economy.
It doesn't makes sense to produce anything in the States anymore (as it's quite obvious the powers that be won't let things deflate). So in the States, all we produce is debt (monetary inflation) at the cost of any morsel of production we currently have or may have in the future.
Like I said, currency devaluation and taxation. Anyhow, your "experience" doesn't really matter because its' anecdotal. On aggregate, everybody's been hit if the currency is being hit or if taxes are being raised.
Your right its anecdotal, can you link to the study that shows that more innocent people are getting hit?
And no, if the currency gets hit not everyone will get hit. Same with taxes. The are obviously ways hedging against a crashing currency and taxes are not that hard to avoid.
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Originally Posted by chuck22b
And that's my point. The Real interest rate is higher than the nominal interest rate when things are deflationary.
Yes....and?? Why does this change whether going into debt makes sense or not?
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Originally Posted by chuck22b
In a deflationary environment Real Interest rates are higher than nominal making debt more expensive than holding cash.
Again, you look at real interest rates regardless of the environment. What you're talking about has no barring on the issue of whether it makes sense for an individual or business to go into debt.
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Originally Posted by chuck22b
Of course things are always uncertain, but things are currently more uncertain than they normally are hence all the "risk" premiums banks and other lenders are tacking on to borrowed money.
This sort of thinking is the source of your problems. Things are no more uncertain now then they were during the boom. The future is always uncertain, there is no meaningful way in which the future is "less certain" sometimes but not others. Banks are not raising raises because of they are uncertain, they are raising rates based on a variety of projections.
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Originally Posted by chuck22b
Of course it matters. Interest rates fluctuate and cost of debt varies and thus timing matters.
The cost of debt always varies and the cost of the debt is obviously a consideration one needs to take when one uses debt. But again, this is always the case.
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Originally Posted by chuck22b
Anyhow, your comment as mentioned above contradicts your previous point that the "present moment" does not matter when determining whether to incur debt.
There is no contradiction. My point is that the same considerations apply regardless of the economic environment. You want to place special restrictions on borrowing when there is a recession, but this makes little sense. You built debt when you were in the intoxication of the boom, yet shun it in a recession even when it could benefit you.
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Originally Posted by chuck22b
But clearly, you just demonstrated above that timing is key and weighs on the decision.
Hogwash. I demonstrated no such thing. Its not about timing, its about strategically using debt. Again, the same considerations apply regardless of the timing.
If you are basing this on my analogy then you misunderstood the analogy. The point is that people act emotionally, they get intoxicated by the herd, etc. When people get intoxicated in the euphoria of a boom, they start to act stupidly. They stop taking calculated risks and start making stupid gambles. But the recession hits, then they get drugged by the recession and stop taking any risks. They act stupidly in both conditions, they should act the same in both. My comment was about psychology, not timing.
I agree,
But without people like them, our economy goes nowhere. ***** if you do ***** if you don't.
The economy does not need people to over spend on housing. Without people like him, housing would actually contract and become more affordable which would ultimately benefit the economy.
As it stands far too much money goes to real estate.
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shifting = shrinking middle class?
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