Americans Hold Over $4.1T in Consumer Debt(60secondstatistics.com)
60secondstatistics.com
Americans Hold Over $4.1T in Consumer Debt
http://60secondstatistics.com/americans-hold-over-4-1-trillion-in-consumer-debt/
205 comments
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 the debt on that $12,600 (actually, that's per person; there are 2.53 people in the median household, so $32k debt). What's the average interest rate? Maybe 10%? That's $266/month just for interest.
Now, economy goes into recession, consumer loses income and will first stop paying unsecured debt (credit cards, student loans), then auto loan until repo, then finally mortgage. And keep in mind median American doesn't have a lot of liquid savings to cushion. If there's anything, it's in 401k or home equity - and now is not a good time to sell. But many are forced to, further increasing supply when buyers are scared off, so prices keep declining.
Everything starts to be sold and assets get repriced. More seized cars at auction. More foreclosed houses. Banks restrict credit. Everything spirals down, quickly. Cashed up HNW investors willing to take the risk buy up firesale assets with cash and hold them. Maybe prices recover eventually, but now more assets are held by fewer people, and you've moved further into inequality.
The US is very much a credit driven economy. That's why the credit crunch of 2007 had such a severe impact.
This just happened a decade ago, and it seems people have already forgotten what it's like.
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 the debt on that $12,600 (actually, that's per person; there are 2.53 people in the median household, so $32k debt). What's the average interest rate? Maybe 10%? That's $266/month just for interest.
Now, economy goes into recession, consumer loses income and will first stop paying unsecured debt (credit cards, student loans), then auto loan until repo, then finally mortgage. And keep in mind median American doesn't have a lot of liquid savings to cushion. If there's anything, it's in 401k or home equity - and now is not a good time to sell. But many are forced to, further increasing supply when buyers are scared off, so prices keep declining.
Everything starts to be sold and assets get repriced. More seized cars at auction. More foreclosed houses. Banks restrict credit. Everything spirals down, quickly. Cashed up HNW investors willing to take the risk buy up firesale assets with cash and hold them. Maybe prices recover eventually, but now more assets are held by fewer people, and you've moved further into inequality.
The US is very much a credit driven economy. That's why the credit crunch of 2007 had such a severe impact.
This just happened a decade ago, and it seems people have already forgotten what it's like.
> What matters, and what lenders look at, is debt serviceability.
Quite true. But it also implies something else: Because the disparity of income levels in the US is so broad, just talking about the problem in terms of national totals and averages is useless. Show me the problem divided up by quantiles of the population, maybe even log-scaled as you get closer to the top, and then I might believe that there's a problem.
Quite true. But it also implies something else: Because the disparity of income levels in the US is so broad, just talking about the problem in terms of national totals and averages is useless. Show me the problem divided up by quantiles of the population, maybe even log-scaled as you get closer to the top, and then I might believe that there's a problem.
Don't look at quantiles, look at people over time. Quantiles conflate poor working families with middle-class college students.
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 these are marketed products. all three have vary optional levels of how much they cost.
then add in all the monthly bills and this is where many people miscalculate and it snow balls. from cell to internet to even television. you can quickly end up paying a significant amount of your income that has no tangible return.
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 these are marketed products. all three have vary optional levels of how much they cost.
then add in all the monthly bills and this is where many people miscalculate and it snow balls. from cell to internet to even television. you can quickly end up paying a significant amount of your income that has no tangible return.
> 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-averse in terms of gains.
[B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500.
2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500.
Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses.
Couple this with the number of people who actually understand the concept of compounded interest rates and yikes.
Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.
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-averse in terms of gains.
[B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500.
2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500.
Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses.
Couple this with the number of people who actually understand the concept of compounded interest rates and yikes.
Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.
Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.
Adding to that - it's the flaw of averages at work in many of those examples. The listed "expected value" in some of those examples could never actually be a real outcome of the examples - it is completely rational to opt to take a 500 loss rather than risk a 1000 loss if you have, say, only 750 to your name and cannot be overdrawn (see debtors prison or whatever incentive one would like to imagine). The expected value of the $500 loss only happens in one option. In the $0 or $1000 loss, if you had repeated draws over time it would indeed trend towards an average of a $500 loss but in a single draw situation, you can never achieve the average so you absolutely must view it as different from the flat $500 loss and compare that to your imagined circumstances in this thought exercise.
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
Yep, your main point that economics' rational man is a complete fiction is absolutely correct.
He's a convenient fiction though. Since to homo oeconomicus a certain expense of USD 500 and the 50 % chance of a USD 1000 expense are the same, expect him to be rolled out to sell you high-deductible health insurance and health savings accounts. H. oeconomicus is the model human, consequently he isn't cashflow constrained, and the fact that HSAs double as tax shelters for the wealthy doesn't concern the Ideal Man either.
University economics is a religion, not a science, it offers up myths instead of testable predictions on observable reality. High finance is a different deal, but they surely don't build their models on university textbooks.
University economics is a religion, not a science, it offers up myths instead of testable predictions on observable reality. High finance is a different deal, but they surely don't build their models on university textbooks.
> University economics is a religion, not a science
That's a bit harsh. Is every field that employs simplified approximations of complex systems a religion as well? With that definition even physics is out and that's one of the more concrete sciences.
That's a bit harsh. Is every field that employs simplified approximations of complex systems a religion as well? With that definition even physics is out and that's one of the more concrete sciences.
At times it does appear to be a religion because of the cult of personality that proliferates (remember the Greenspan years?) and, most significantly, the blind faith and slavish devotion to free markets being a solution to everything.
What I find most off-putting are those who advocate for wholesale changes in our society on little more than hypothesis and faith instead of running experiments starting at the smallest reasonable scale and then successively working your way up from that.
It should at least pretend to try to applying basic scientific methodologies to its practice.Psychology has evolved to being a rigorous, evidence based social science. That psychology is not one of the foundations of studying economics is also problematic too.
What I find most off-putting are those who advocate for wholesale changes in our society on little more than hypothesis and faith instead of running experiments starting at the smallest reasonable scale and then successively working your way up from that.
It should at least pretend to try to applying basic scientific methodologies to its practice.Psychology has evolved to being a rigorous, evidence based social science. That psychology is not one of the foundations of studying economics is also problematic too.
If it does not admit that it's simplified assumptions are simplified assumptions and seek to improve them, then yes. Which does not apply to physics.
Economics has a weird tendency to invoke "outside shocks" to explain why their models fail, and seems to have difficulty identifying those shocks.
Economics has a weird tendency to invoke "outside shocks" to explain why their models fail, and seems to have difficulty identifying those shocks.
For a real world example, consider government bonds which have relatively low returns but are almost guaranteed.
Yes. There are many cases where a lower expected value is a rational trade off for reduced variance.
You are defining rational behavior as ignoring variance and accepting expectation as a gauranteed outcome for a trial.
I don't want to be a jerk, but you are wrong to a phenomenal degree.
I don't want to be a jerk, but you are wrong to a phenomenal degree.
You're not being a jerk. I should've put quotes around rational to highlight that this was the common thinking at the time in the field. That was just a extremely example of Prospect Theory. Before this was presented as a better model to understand human behavior, the prevailing theory didn't take into account that humans are even risk averse with gains and more likely to take risks with losses. My main point was that it took psychologists to present a model of man that resembled reality
Cumulative Prospect Theory takes this into account and states that people tend to overweight extreme, but unlikely events, but underweight "average" events, but I digress
I was just trying to show the base irrationality of the human mind. Here's another example. Consider you have two offers for the New York Times:
[A] $59 – Internet Only Subscription $125 – Internet and Print Subscription
[B] $59 – Internet Only Subscription $125 – Print Only Subscription $125 – Internet and Print Subscription
Both offers are the same, with the exception of including the “print only” subscription in Offer A. Despite the fact that not a single person chose that unattractive offer, its impact was dramatic – In a study, 62% more subjects chose the combined print and Internet offer, and predicted revenue jumped 43%. The print-only offer was the decoy, and served to make the combined offer look like a better value. This is called decoy marketing and is only one of an arsenal of tools that is used to take advantage of the irrational mind. You'll see this everywhere so it pays to identify it.
Cumulative Prospect Theory takes this into account and states that people tend to overweight extreme, but unlikely events, but underweight "average" events, but I digress
I was just trying to show the base irrationality of the human mind. Here's another example. Consider you have two offers for the New York Times:
[A] $59 – Internet Only Subscription $125 – Internet and Print Subscription
[B] $59 – Internet Only Subscription $125 – Print Only Subscription $125 – Internet and Print Subscription
Both offers are the same, with the exception of including the “print only” subscription in Offer A. Despite the fact that not a single person chose that unattractive offer, its impact was dramatic – In a study, 62% more subjects chose the combined print and Internet offer, and predicted revenue jumped 43%. The print-only offer was the decoy, and served to make the combined offer look like a better value. This is called decoy marketing and is only one of an arsenal of tools that is used to take advantage of the irrational mind. You'll see this everywhere so it pays to identify it.
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.
Your argument is nonsensical. Your scenarios have differences in risk. Transferring risk from one party to another is the entire basis of our financial system. To assume risk is irrelevant in step one is to fundamentally misunderstand how economic decision making works.
You are missing the greater point. I agree with you. Before Prospect Theory, economists did assume risk was irrelevant and that one would choose either A or B for both. That even a layman would find it nonsensical is exactly my point.
I should've put rational in quotes to show sarcasm or followed rational with "defined by economists at that time"
I should've put rational in quotes to show sarcasm or followed rational with "defined by economists at that time"
> That even a layman would find it nonsensical is exactly my point.
I have a degree in economics and both my parents are professors of economics, so I have some perspective on this. Economics as a discipline has never really been confused about risk in the way you describe.
I have a degree in economics and both my parents are professors of economics, so I have some perspective on this. Economics as a discipline has never really been confused about risk in the way you describe.
Let's look at it another way and the so-called "sunk cost" fallacy. I have somewhat expensive tickets to an NBA game. On the night of the game, I'm sick and there's a blizzard. If I paid for those tickets, I'm damn well going to that game. If they were given to me, I'm staying in. Study after study shows that most people also would act in this matter. That this type of behavior was considered irrational made me think that a lot of economists in the past didn't try to understand actual human behavior. BTW - this is not comparable to an investment situation
I have a degree in economics too and my main complaint is that I wish those in the field treated it with more rigor, more like a scientific or engineering field... explicitly state the simplified assumptions and limits on the models. And don't proclaim that your model is correct without experimenting. It's not as much a problem as it was in the past, but people like Hayek advocated for whole changes in society based upon ideology and philosophy without any experimental evidence. I understand it is difficult to conduct experiments, but if that is the case, stop being so certain and adamant in your position without evidence
I have a degree in economics too and my main complaint is that I wish those in the field treated it with more rigor, more like a scientific or engineering field... explicitly state the simplified assumptions and limits on the models. And don't proclaim that your model is correct without experimenting. It's not as much a problem as it was in the past, but people like Hayek advocated for whole changes in society based upon ideology and philosophy without any experimental evidence. I understand it is difficult to conduct experiments, but if that is the case, stop being so certain and adamant in your position without evidence
Nit: observed values converge on expected values over many trials. If you asked me which strategy I'd like to play 100,000 times, I'd take the 50% chance. Just once, I'll take the $49.
[deleted]
"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.
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.
It may have been that debt that ended up on the books, but what do your monthly expenditures look like in terms of vehicles, eating out, entertainment, etc? If you have cash on hand to pay those expenses you have cash to pay your debit. This may not be your personal case but I have seen this a lot.
Sorry for delayed response. I had to reread your comment to understand.
My burn rate is very low.
When I'm not working, it's because I'm sick, meaning no income. I'm too stubborn or principled or stupid to take unemployment (unless I'm actually looking for work). And I'm not sick enough for disability.
During those times I chew down my savings. This last round, I dipped into my 401k. (I had 6 months savings, expected to be out of work for 2 months, stretched to 10, had some major expenses come up.)
Then I get somewhat healthy, pay off my new medical bills, save what I can. Until next time.
Rinse, lather, repeat.
My burn rate is very low.
When I'm not working, it's because I'm sick, meaning no income. I'm too stubborn or principled or stupid to take unemployment (unless I'm actually looking for work). And I'm not sick enough for disability.
During those times I chew down my savings. This last round, I dipped into my 401k. (I had 6 months savings, expected to be out of work for 2 months, stretched to 10, had some major expenses come up.)
Then I get somewhat healthy, pay off my new medical bills, save what I can. Until next time.
Rinse, lather, repeat.
[deleted]
My lesson in financial responsibility was to have to live on 8000--10000$/year for three years. Coming from a solidly middle class income, it was a real shock. I am very credit averse, now, since even a modest level of credit sunk as fixed cost with no benefit.
Buy everything with credit card. Establish your credit rating in case you need to borrow, and take advantage of whatever reward program fits you best. Always pay of the entirety of your balance every month.
See Fisher's theory of debt deflation: https://en.m.wikipedia.org/wiki/Debt_deflation
The median household probably has to pay taxes too.
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.
Also, the more indebted the consumer, the higher the impact of rising interest rates on consumer spending. Every time the Fed raises rates by 0.25 percentage points, consumers need to pay an additional $10B in interest per year. Consequently, the rate of interest increasing by 1 percentage point today is not the same as it increasing by 1 percentage point pre-2008 (when total consumer debt was lower).
That doesn't quite make sense. The interest on revolving debt is fixed at the level it was when you acquired the debt. Raising the rate across the board will definitely cause a lot of people to pay more, but only to the extent that they cannot stop themselves from buying more things on the card.
On secured loans sure.
Credit cards are always priced at prime+margin, based on 30-60 day average balance. That can change every 30 days.
Credit cards are always priced at prime+margin, based on 30-60 day average balance. That can change every 30 days.
This is interesting.. source?
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 living drop by at least 1/3 in 25 years and it's continuing to erode. That's the world's #3 economy and formerly an economic juggernaut.
Or look at the financial situation across most of the EU or Eurozone - most of Europe is hooked on between zero and negative real interest rates. Italy is in a ten year rolling depression. Spain, Portugal and Greece still haven't recovered. Russia's commodity based economic miracle is long over, as the price of oil isn't going back to $100 any time soon. France is averaging wage growth about 1/5th that of the US. Germany's economy has barely net expanded since 2008. Or take a look at the long-term unemployment figures for most European nations, contrasting 2006 vs 2016, it's clearly dire.
The US is in better shape than all but a few developed nations. That includes unemployment rate, income levels, wage growth, GDP growth, household income to debt ratio, cost of living, housing affordability.
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 living drop by at least 1/3 in 25 years and it's continuing to erode. That's the world's #3 economy and formerly an economic juggernaut.
Or look at the financial situation across most of the EU or Eurozone - most of Europe is hooked on between zero and negative real interest rates. Italy is in a ten year rolling depression. Spain, Portugal and Greece still haven't recovered. Russia's commodity based economic miracle is long over, as the price of oil isn't going back to $100 any time soon. France is averaging wage growth about 1/5th that of the US. Germany's economy has barely net expanded since 2008. Or take a look at the long-term unemployment figures for most European nations, contrasting 2006 vs 2016, it's clearly dire.
The US is in better shape than all but a few developed nations. That includes unemployment rate, income levels, wage growth, GDP growth, household income to debt ratio, cost of living, housing affordability.
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.
You're making it seem like there are no social services in the US yet 2/3 of the federal budget pays for just that.
If make up to ~200% (varies state to state) of the federal poverty level you qualify for Medicaid which has almost no out of pocket expense for the patient.
If make up to ~200% (varies state to state) of the federal poverty level you qualify for Medicaid which has almost no out of pocket expense for the patient.
That budget is mostly social security and Medicaid.
In New York, it's 138%, or $16k/year for a single person for $33k for a family of 4.
In New York, it's 138%, or $16k/year for a single person for $33k for a family of 4.
Perhaps that lack of social support (and thus lower taxes) is the very reason why the US is not in the same situation as the Eastern EU.
A high debt ratio seems less insane in those countries, where their social insurance heavily insulates them from the biggest catastrophic events: job loss and medical bills.
I don't know about the other countries but Sweden is in a ridiculous housing bubble, where even for someone with poor finances, it makes more sense to buy an apartment and just pay the interest on it (and then sell it for more than you bought it for when you move out) rather than to try find a rental apartment and pay the same amount you'd pay in interest in rent. This means that everyone has these huge home loans that look like "safe bets" (and there's no reason to expect the bubble will burst anytime soon since housing isn't being built fast enough)
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.
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.
That is an important point, but it's not a point that falls out of the country's consumer debt to GDP ratio. The first question you should have with a headline like this is, "is $4.1 trillion a strange number in its proper context".
The comment upthread is pretty valuable (as is 'cylinder's rebuttal).
The comment upthread is pretty valuable (as is 'cylinder's rebuttal).
In the UK recently they found that almost 25% of the population had less than £100 in savings
>It is difficult to evaluate credit card debt because credit cards have increasingly become the substitute for cash in the United States. How much of the debt is extremely short term and essentially represents what used to be cash transactions?
Indeed, I've often wondered this. If someone has an average $3000 credit card balance that they pay off in full when due, are they listed as having $3000 in consumer debt on account of that?
Indeed, I've often wondered this. If someone has an average $3000 credit card balance that they pay off in full when due, are they listed as having $3000 in consumer debt on account of that?
Yes. The credit bureau just shows the balance.
Card issuer knows whether you are a transactor (pay the entire balance each month) or revolver (carry over some of the balance and therefore pay interest on it). This is a strong risk predictor.
Card issuer knows whether you are a transactor (pay the entire balance each month) or revolver (carry over some of the balance and therefore pay interest on it). This is a strong risk predictor.
That's exactly how it shows on my credit report, so I'd assume "yes". (Source: I'm refinancing my house, so I happen to have a recent credit report pulled as part of that.)
Should be possible to look at interest paid on credit card loans to better judge this?
I am going to split hairs... and honestly, this idea/concept isnt fully thought out so maybe someone can help me out here.
Student loans would be an investment if like other investments, it could be removed from someone's 'portfolio'. IMO the fact that student loans are not dischargable means they are not an investment.
Not sure what we should call student loans, but 'investment' seems like the wrong word.
Student loans would be an investment if like other investments, it could be removed from someone's 'portfolio'. IMO the fact that student loans are not dischargable means they are not an investment.
Not sure what we should call student loans, but 'investment' seems like the wrong word.
"Not dischargable" means you can't rid yourself of them easily through bankruptcy. It's the nature of most loans that you can't remove them from your portfolio; you have to pay them off.
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 great. Real estate has low liquidity, low diversification and high leverage requirements.
Shelter is an expense. Like many things, you can own it or you can rent it. Owning it means you're holding an asset that (hopefully) won't depreciate but it is also unlikely to meaningfully appreciate (outside of certain local market conditions that are the exception rather than the rule).
Back to the original point: in order for an education to be an investment, the degree - the asset - must have a reasonable expectation of going up in value over time. The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. An argument could be made that the return on investment is a rise in earning potential but that too is a one time boost. A degree also shares all the bad qualities of housing as an investment: high leverage, even worse - zero! - liquidity, and low diversification.
It might make financial sense to borrow money in order to fund a degree, but that by no means makes education an investment.
Shelter is an expense. Like many things, you can own it or you can rent it. Owning it means you're holding an asset that (hopefully) won't depreciate but it is also unlikely to meaningfully appreciate (outside of certain local market conditions that are the exception rather than the rule).
Back to the original point: in order for an education to be an investment, the degree - the asset - must have a reasonable expectation of going up in value over time. The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. An argument could be made that the return on investment is a rise in earning potential but that too is a one time boost. A degree also shares all the bad qualities of housing as an investment: high leverage, even worse - zero! - liquidity, and low diversification.
It might make financial sense to borrow money in order to fund a degree, but that by no means makes education an investment.
> 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.
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.
> 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 did not have to pay in rent.
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 did not have to pay in rent.
> So to figure out the overall value of the investment...
The value of an investment has nothing to do with how much use you get out of it. You're conflating investments with assets.
The value of an investment is how much you can sell it for and how much money it bring you (dividends, etc). The value of an asset is how much value you're currently getting out of it.
The fact that you'll have to pay money for rent is immaterial. You can count that as paying rent to yourself by owning a house.
The equation is simply costs should be less than outlay. If rent <= property taxes + interest on down payment + property taxes + amortized closing costs + opportunity cost for not being able to easily move + repair costs - tax benefits, you win. Otherwise, you're losing.
The value of an investment has nothing to do with how much use you get out of it. You're conflating investments with assets.
The value of an investment is how much you can sell it for and how much money it bring you (dividends, etc). The value of an asset is how much value you're currently getting out of it.
The fact that you'll have to pay money for rent is immaterial. You can count that as paying rent to yourself by owning a house.
The equation is simply costs should be less than outlay. If rent <= property taxes + interest on down payment + property taxes + amortized closing costs + opportunity cost for not being able to easily move + repair costs - tax benefits, you win. Otherwise, you're losing.
> The value of an investment has nothing to do with how much use you get out of it. You're conflating investments with assets.
A house can be both.
A house can be both.
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), their cash flows are also identical to the situation of each living in their own house.
Now, it is possible that you would not rent a place similar to the one that you buy. In this case, your savings are equal to (rent expense otherwise incurred) - (unrealized rental income). I think that the latter will tend to be higher than the former. This will result in a net loss for owning. This loss is simply the price the owner pays for occupying a nicer place and does not really have much to do with owning vs renting.
Now, it is possible that you would not rent a place similar to the one that you buy. In this case, your savings are equal to (rent expense otherwise incurred) - (unrealized rental income). I think that the latter will tend to be higher than the former. This will result in a net loss for owning. This loss is simply the price the owner pays for occupying a nicer place and does not really have much to do with owning vs renting.
Alice and Bob don't help or hinder your argument in any way. It just seems like a non sequitur.
Selection of choice to rent vs buy typically isn't driven by net wealth change considerations; rather, it's an investment in an area, because the transaction costs of house purchases are much higher than changing rental leases, and thus you need to stay in a bought house longer to spread the costs. In particular, houses bought for living (rather than rental) are more often selected for life-changing events, like starting a family, or downsizing when children have left the family home.
Further, your bald assertion that unrealized rental income will be greater than rent expense otherwise incurred - if I read this right, it means you think people will buy a more expensive property than they would rent - I think is wholly unjustified. I think you've got it exactly backward, and that's certainly the case in my rental vs purchasing history: I've always rented places that I couldn't afford to buy.
When I was younger, I valued being closer to the heart of the city (London in my case). That meant denser living, apartments, etc. When I chose to buy, I couldn't afford to buy the places I'd been renting, but also my values had changed: I wanted somewhere with more space, not least because I had more stuff (like motorcycles, which meant a garage; and an office distinct from the living room; etc.)
Selection of choice to rent vs buy typically isn't driven by net wealth change considerations; rather, it's an investment in an area, because the transaction costs of house purchases are much higher than changing rental leases, and thus you need to stay in a bought house longer to spread the costs. In particular, houses bought for living (rather than rental) are more often selected for life-changing events, like starting a family, or downsizing when children have left the family home.
Further, your bald assertion that unrealized rental income will be greater than rent expense otherwise incurred - if I read this right, it means you think people will buy a more expensive property than they would rent - I think is wholly unjustified. I think you've got it exactly backward, and that's certainly the case in my rental vs purchasing history: I've always rented places that I couldn't afford to buy.
When I was younger, I valued being closer to the heart of the city (London in my case). That meant denser living, apartments, etc. When I chose to buy, I couldn't afford to buy the places I'd been renting, but also my values had changed: I wanted somewhere with more space, not least because I had more stuff (like motorcycles, which meant a garage; and an office distinct from the living room; etc.)
It varies. Personally if I am renting I want to minimize that outgoing when saving for a nicer place to buy. I came close but quantitative easing killed that for me but the intention was there and now I'm back renting a cheap a place that suits my circumstances.
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 did not have to pay in rent.
I'm countering this assertion that you need to subtract all the money that the owner did not have to pay in rent because this is going to be equal to the amount that the owner did not earn in rent by renting out their house.
People who buy a house for living (rather than rental) do not often make a rational economic investment decision which is kind of my point.
Sorry, I did not make it clear that I was assuming a comparison between renting and owning in the same neighbourhood. People (Americans in particular) generally rent apartments and buy houses, as you rightly pointed out. Within the same neighbourhood, a house is going to cost more to rent than an apartment.
I'm countering this assertion that you need to subtract all the money that the owner did not have to pay in rent because this is going to be equal to the amount that the owner did not earn in rent by renting out their house.
People who buy a house for living (rather than rental) do not often make a rational economic investment decision which is kind of my point.
Sorry, I did not make it clear that I was assuming a comparison between renting and owning in the same neighbourhood. People (Americans in particular) generally rent apartments and buy houses, as you rightly pointed out. Within the same neighbourhood, a house is going to cost more to rent than an apartment.
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...
But not totally independent. Renting almost has to be more expensive than buying.
In a first approximation, if rent is much less than owning + expenses, the property owner will have to sell or go bankrupt, which will reduce property values. If rent is much greater, then property owners have an incentive to increase the rental market, lowering rents and raising property values. At a theoretical level, owning carries more uncertainty than renting.
Of course, weird circumstances can upset things: a decrease in acceptable uncertainty can cause rents to go up faster than the market can otherwise adjust, for example.
My past experience says that renting costs more than owning, but bit by much.
But I don't know what you think an inordinate down payment is.
In a first approximation, if rent is much less than owning + expenses, the property owner will have to sell or go bankrupt, which will reduce property values. If rent is much greater, then property owners have an incentive to increase the rental market, lowering rents and raising property values. At a theoretical level, owning carries more uncertainty than renting.
Of course, weird circumstances can upset things: a decrease in acceptable uncertainty can cause rents to go up faster than the market can otherwise adjust, for example.
My past experience says that renting costs more than owning, but bit by much.
But I don't know what you think an inordinate down payment is.
Well in 30 years you'll at least own it. Would suck to be renting in your late 60's and paying for that on retirement income.
But you can invest the difference in something more liquid and diversified and use that income to forever pay your rent.
That's true, but most of the time it's just as expensive to rent than buy. You are paying the mortgage of your landlord, along with their salary.
Not really true, especially with multi unit housing. The mortgage is split between tenants. Rentals are generally also not responsible for fixing things like broken pipes or furnace repairs either.
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.
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.
If your investment basis is your cash outlay you make to acquire the property, then you should only count the value of the house minus the value of the mortgage as an asset on your balance sheet. Chances are, you will count the whole value of the house as an asset on your balance sheet and the mortgage as a liability so your basis in the house is the total value of the property plus the interest you pay over the lifetime of the mortgage - this is greater than the total value of the property. The rent expense on an identical property is offset by commuted rent income due to occupying the property instead of renting it out.
If the interest rate on the mortgage is equal to inflation, then you will realize the same gains on the house as if you put the downpayment in an interest bearing account at that same interest rate. This is before accounting for transaction costs, property taxes, upkeep, etc. If the mortgage rate is lower than inflation then you will have a larger gain and if the mortgage rate is higher than inflation then you will lose money.
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The increase in earnings will be largest when you have 0 years of work experience and smallest when you have 40 years of work experience. In this sense, the value of the degree diminishes over time as the value of your work experience increases.
Alternatively, you can do a discounted cash flow analysis on this increase in lifetime earnings to get the present value of the degree - you could do this while still in school, at graduation or partway through your career. Arguably, if you do this analysis partway through your career, you should include the increases in earnings already realized in which case the value of the degree will likely remain static or drop slightly over time. Regardless, the value of the degree will not go up over time.
The value of the actual education itself to a career is usually lower than the value of a random (as in random access) sample of 4 years of work experience. However, the value of the education & degree to getting the first, second, and perhaps even third job is non-negligible.
If the interest rate on the mortgage is equal to inflation, then you will realize the same gains on the house as if you put the downpayment in an interest bearing account at that same interest rate. This is before accounting for transaction costs, property taxes, upkeep, etc. If the mortgage rate is lower than inflation then you will have a larger gain and if the mortgage rate is higher than inflation then you will lose money.
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The increase in earnings will be largest when you have 0 years of work experience and smallest when you have 40 years of work experience. In this sense, the value of the degree diminishes over time as the value of your work experience increases.
Alternatively, you can do a discounted cash flow analysis on this increase in lifetime earnings to get the present value of the degree - you could do this while still in school, at graduation or partway through your career. Arguably, if you do this analysis partway through your career, you should include the increases in earnings already realized in which case the value of the degree will likely remain static or drop slightly over time. Regardless, the value of the degree will not go up over time.
The value of the actual education itself to a career is usually lower than the value of a random (as in random access) sample of 4 years of work experience. However, the value of the education & degree to getting the first, second, and perhaps even third job is non-negligible.
The balance sheet entries for a home are the current market value of the property as an asset, and the current payoff value of the mortgage as a liability.
Mortgage interest doesn't go on the balance sheet because it is an expense, not a liability. Other property expenses include property tax, insurance, upkeep and maintenance, repairs, etc.
These expenses do not magically disappear just because a property is a rental. If you are paying rent, you are paying all these expenses, unless your landlord is purposefully losing money on you.
I'm not here to claim that buying a home with a mortgage is the best investment for everyone. That depends on the particulars of each situation. I'm just challenging the notion that buying a home is not an investment.
People buy homes because they expect to get a return, and most do. Same with education. If your analyses comes to the conclusion that that is not possible, then you need to check against the data actually coming out of the economy.
Mortgage interest doesn't go on the balance sheet because it is an expense, not a liability. Other property expenses include property tax, insurance, upkeep and maintenance, repairs, etc.
These expenses do not magically disappear just because a property is a rental. If you are paying rent, you are paying all these expenses, unless your landlord is purposefully losing money on you.
I'm not here to claim that buying a home with a mortgage is the best investment for everyone. That depends on the particulars of each situation. I'm just challenging the notion that buying a home is not an investment.
People buy homes because they expect to get a return, and most do. Same with education. If your analyses comes to the conclusion that that is not possible, then you need to check against the data actually coming out of the economy.
> Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation.
Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even.
Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss.
> Voila: the power of leverage.
Leverage is just a tool you have, that can come back and bite you. If you leverage your investment by 10X, the real increases and decreases in value (adjusted for inflation) are 10X what they would be if you had not leveraged your assets. If you lose 10K of value on a 100k house that you put 20k down on, voila, the power of leverage. You just lost 50% of your investment.
> I'm not aware of any evidence that this is true.
The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity. If you're right out of college, your degree works as a proxy to that.
For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even.
Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss.
> Voila: the power of leverage.
Leverage is just a tool you have, that can come back and bite you. If you leverage your investment by 10X, the real increases and decreases in value (adjusted for inflation) are 10X what they would be if you had not leveraged your assets. If you lose 10K of value on a 100k house that you put 20k down on, voila, the power of leverage. You just lost 50% of your investment.
> I'm not aware of any evidence that this is true.
The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity. If you're right out of college, your degree works as a proxy to that.
For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
When you rent, you are also paying interest on a loan--just not your loan. Unless you think that only 100% paid-for properties are rented out, or that property owners rent out their property for less than their own monthly payment.
Yes leverage is just a tool. The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
> The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity.
This is speculation by you. Again: note how many resumes keep college on them.
> For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
This is self-contradictory unless you think that salaries for people with degrees grow more slowly than for people without degrees.
Yes leverage is just a tool. The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
> The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity.
This is speculation by you. Again: note how many resumes keep college on them.
> For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
This is self-contradictory unless you think that salaries for people with degrees grow more slowly than for people without degrees.
> When you rent, you are also paying interest on a loan--just not your loan.
Actually, you're paying somebody who also might be paying interest on a loan. What happens to money after you pay it is immaterial. You're not paying interest on a rent debt you've accumulated.
> The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
You're spinning it in terms of pure rewards. When you leverage your money on an investment which can have value go both up and down, you're just magnifying your exposure. Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt. If that's the case, go buy up some tulip bulb.
> This is speculation by you. Again: note how many resumes keep college on them.
And also by you - if we did an A/B test based on years of experience vs college, we can see whether that matters or not. Everything else is speculation.
> you think that salaries for people with degrees grow more slowly than for people without degrees.
Of course they do. If you start off earning 30k as a high school dropout doing the same job as somebody earning 60k who has a degree, your wage will rise more quickly if you perform at the same level.
Actually, you're paying somebody who also might be paying interest on a loan. What happens to money after you pay it is immaterial. You're not paying interest on a rent debt you've accumulated.
> The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
You're spinning it in terms of pure rewards. When you leverage your money on an investment which can have value go both up and down, you're just magnifying your exposure. Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt. If that's the case, go buy up some tulip bulb.
> This is speculation by you. Again: note how many resumes keep college on them.
And also by you - if we did an A/B test based on years of experience vs college, we can see whether that matters or not. Everything else is speculation.
> you think that salaries for people with degrees grow more slowly than for people without degrees.
Of course they do. If you start off earning 30k as a high school dropout doing the same job as somebody earning 60k who has a degree, your wage will rise more quickly if you perform at the same level.
> Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt.
It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation, which is upward. My point is simply that leverage permits a return higher than inflation under those circumstances. I wouldn't claim that housing prices are some sort of "sure thing," and I don't think I did.
> And also by you
Yes, but the difference is I know I'm speculating.
Unless you've got some actual data to bring, I'm not interested in a guessing contest.
It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation, which is upward. My point is simply that leverage permits a return higher than inflation under those circumstances. I wouldn't claim that housing prices are some sort of "sure thing," and I don't think I did.
> And also by you
Yes, but the difference is I know I'm speculating.
Unless you've got some actual data to bring, I'm not interested in a guessing contest.
> It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation...
Well, my point is that if you leverage yourself in an investment that just tracks inflation, you're running in place. Leverage doesn't do anything in real terms here. The number value in your bank account might go up, but your real purchasing power doesn't.
That was my point, that in this situation leverage doesn't help you, and that fundamentally if you're trying to use leverage in this situation, you're hoping that housing prices rise faster than inflation does.
Well, my point is that if you leverage yourself in an investment that just tracks inflation, you're running in place. Leverage doesn't do anything in real terms here. The number value in your bank account might go up, but your real purchasing power doesn't.
That was my point, that in this situation leverage doesn't help you, and that fundamentally if you're trying to use leverage in this situation, you're hoping that housing prices rise faster than inflation does.
I think your idea of an investment is different than mine. I dont own a home, but one reason i am tempted to buy one is to match liabilities (future rent) with assets.
A house allows you to hedge rent growth. The big challenge with houses is that they are leveraged. That makes the situation complex in that the equity investment you make can become way more or way less valuable with smaller underlying price moves in the house.
Investments can go up or down in value. There are no sure thing investments. Just choices with various lnevels of risk and tradeoffs.
Imo, student loans are not constructed in a way that makes them an investment since the optionality is removed from the borrower.
A house allows you to hedge rent growth. The big challenge with houses is that they are leveraged. That makes the situation complex in that the equity investment you make can become way more or way less valuable with smaller underlying price moves in the house.
Investments can go up or down in value. There are no sure thing investments. Just choices with various lnevels of risk and tradeoffs.
Imo, student loans are not constructed in a way that makes them an investment since the optionality is removed from the borrower.
An investment isn't necessarily something that is expected to go up in value, it is something that is expected to make you money. If I buy a house and rent it out, and the value of the house also tracks inflation, it made me money through rent. If I owner occupy I receive that money in the form of lower expenses, but that's just details.
Similarly, if my education increases my lifetime earnings by more than it cost me then it is a good investment, regardless of where in my career I make that return. The idea that my education must increase in value over my career in order to be considered an investment is very, very strange.
You can argue that these investments are frequently bad, but it doesn't make sense to argue they are not investments.
Similarly, if my education increases my lifetime earnings by more than it cost me then it is a good investment, regardless of where in my career I make that return. The idea that my education must increase in value over my career in order to be considered an investment is very, very strange.
You can argue that these investments are frequently bad, but it doesn't make sense to argue they are not investments.
> 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.
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.
But you also get the benefit of using the house while you own it, so if you give that a financial value, it may very well be a good investment (vs renting)... or it may still be a bad one- depends on a lot of factors.
It's entirely possible to take on student debt without ever getting a degree. Some of the numbers I've seen suggest about 30% dropout rates with student loan debt.
How is that any different from a short sale investment?
I agree, but no one looks at the other forms of consumer debt as investments. If we are going to call student loans investments, we might as well call autoloans investments. The same logic could be applied. A car helps you get to a job and gives you a return.
It's an investment if it used to improve your economic condition, otherwise an expense.
Maybe better phrasing would be you expect investments to appreciate in value. Although student loans could be viewed this way as investments they certainly not investments in the typical sense.
You take out a car loan because you expect to extract more value from the car than its price plus interest. You take out a student loan for the same reason.
If student loans were buying a some percentage of your monetary worth or income then I could see investment angle but that's basically owning a person which I couldn't support.
You take out a car loan because you expect to extract more value from the car than its price plus interest. You take out a student loan for the same reason.
If student loans were buying a some percentage of your monetary worth or income then I could see investment angle but that's basically owning a person which I couldn't support.
> Student loans represent a long term investment and may be reasonably paid off over decades.
There are a number of indication that calls this into question.
- Size of loans vs. prospective or actual salaries after study.
- Age of debtors (some surprisingly old)
- Number of loans becoming delinquent
- Student loans taking off while other forms of consumer credit are stagnant or declining indicating that student loans are filling gaps elsewhere
- Unprecedented volume of student loans
There are a number of indication that calls this into question.
- Size of loans vs. prospective or actual salaries after study.
- Age of debtors (some surprisingly old)
- Number of loans becoming delinquent
- Student loans taking off while other forms of consumer credit are stagnant or declining indicating that student loans are filling gaps elsewhere
- Unprecedented volume of student loans
> Thus, $4.1 trillion in consumer debt works out to $12,638 per person.
> The Gross Domestic Product (GDP) in the United States was worth 18036.65 billion (about $18 trillion) US dollars in 2015. That is about $55,424 per person.
Another important number: Wealth in the U.S. is ~$90 trillion, or ~$270,000 per person. That makes $13,000 in debt seem easier to support.
Of course it depends highly on the distributions of wealth and debt. $80 billion of that wealth are in one person's hands, for example; he doesn't have debt problems.
> The Gross Domestic Product (GDP) in the United States was worth 18036.65 billion (about $18 trillion) US dollars in 2015. That is about $55,424 per person.
Another important number: Wealth in the U.S. is ~$90 trillion, or ~$270,000 per person. That makes $13,000 in debt seem easier to support.
Of course it depends highly on the distributions of wealth and debt. $80 billion of that wealth are in one person's hands, for example; he doesn't have debt problems.
GDP has little correlation with individual's ability to create monetary wealth.
The issue is the trend of many of the categories you listed. Your student loan assumptions are proving to be incorrect and your stats for cars appear to be from previous decades.
>Consumers are stretching out auto loans farther than ever to a new record of 68 months. The longer the term, the lower the monthly payment. In the first quarter, almost a third of all auto loans came with repayment terms of 73-84 months, which was the most popular term among new vehicle buyers.
http://www.cnbc.com/2016/06/02/us-borrowers-are-paying-more-...
>Consumers are stretching out auto loans farther than ever to a new record of 68 months. The longer the term, the lower the monthly payment. In the first quarter, almost a third of all auto loans came with repayment terms of 73-84 months, which was the most popular term among new vehicle buyers.
http://www.cnbc.com/2016/06/02/us-borrowers-are-paying-more-...
I think that is a really really misleading way of looking at it. The debt burden is not carried equally across all demographics but is likely disproportionally allocated towards the young whereas wages are skewed towards the old. Also, just because you made the numbers sound small in an absolute sense doesn't mean they aren't large in a historical context.
Your GDP figure is missing about $600 to $700 billion (equal to half the Australian or Russian economy):
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
Yes. If anything, the bigger issue is national debt. It can be broken out into investments versus borrowing for transfer payments, but either way the #s come out much higher. And it's easier for consumers to walk away from debt in a bankruptcy than it is for a country.
That is a difficult comparison. If all of my debt was denominated in a currency that I explicitly controlled the supply of, I wouldn't need to declare bankruptcy, I'd just increase the supply of money so I was solvent.
At this time, the cost to the nation of servicing the debt is around what, 6 percent of income? I bet a lot of consumers (more than half) would find that to be very affordable.
At this time, the cost to the nation of servicing the debt is around what, 6 percent of income? I bet a lot of consumers (more than half) would find that to be very affordable.
Yes - interest rates on our debt is low. But increasing the money supply will eventually come with inflation, and with that higher interest rates.
Eventually people will stop lending countries money. If they don't - that's even scarier. (A lack of viable investment alternatives)
Eventually people will stop lending countries money. If they don't - that's even scarier. (A lack of viable investment alternatives)
> What is "other" consumer debt -- payday loans? IOU's?
Other types of consumer loans, like furniture or other lines of credit. Additionally, many new phones are leased.
Other types of consumer loans, like furniture or other lines of credit. Additionally, many new phones are leased.
Student Loans are increasingly a bad investment. But whatever.
$12k is a fuck ton of debt! A metric fuck ton, ~20% of avg yearly income. Not even counting mortgages.
$12k is a fuck ton of debt! A metric fuck ton, ~20% of avg yearly income. Not even counting mortgages.
Other consumer debt includes mortgages.
I'm sure there were people making similar arguments about the health of the US economy before 2008.
http://inflation.us/wp-content/uploads/2015/04/niareport84.j...
I'm sure there were people making similar arguments about the health of the US economy before 2008.
http://inflation.us/wp-content/uploads/2015/04/niareport84.j...
Both of these statements are true.
The most dangerous problem with the housing crisis in 2008 was not the amount of debt. It was the feedback loop that was created by defaulting on that debt. Foreclosed homes naturally have a lower value than non-foreclosed homes. Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their houses foreclosed on, the value of your home will go down. If the value of your home goes down too much, it becomes nearly impossible to refinance your mortgage (which was important due to all the crazy adjustable rate mortgages that were handed out in the preceding years). This leads to more and more foreclosures and worse and worse home values.
That feedback loop does not exist with unsecured debt. If your neighbors to both your right and left can't pay their student loan, the value of your education will not go down.
That feedback loop does not exist with unsecured debt. If your neighbors to both your right and left can't pay their student loan, the value of your education will not go down.
And with securitization of mortgages, original lender doesn't have skin in the game. The servicer has to follow the rules very tightly, so they will quickly go for foreclosure, it doesn't matter if you call them and say you just got a job offer so you can pay in a month. If loans were held on the balance sheet of the bank, you'd call up a rep at the bank and they'd work with you to figure something out. Foreclosure is the last resort for the lender because they want you paying interest, they don't want to deal with running and selling a house.
It sounds like the actual most dangerous problem was people financing homes on unsustainable lending terms, literally requiring the home value to go up so you could refinance before your ARM teaser rate expired.
Fault for that goes both ways, towards to people who took the loan and the people who gave the loan. The people who gave the loan knew a lot more about the specific details and risks, so I find it hard to blame the people who took the loan.
That is exactly why /those/ institutions should have 'defaulted' and gone in to orderly holding/liquidation. They are the experts that performed malpractice on society at large.
> Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their houses foreclosed on, the value of your home will go down.
It does not work quite like that. If there are a lot of foreclosures in a neighbor the prices will come down because of the additional inventory. Appraisals though are supposed to look at comparable homes, and take into account if the homes were sold under duress. A house or two in the neighborhood that either was foreclosed on, or sold much lower because the owner needed out should not impact an appraisal very much. Those are one off deals and do not reflect the market as a whole.
It does not work quite like that. If there are a lot of foreclosures in a neighbor the prices will come down because of the additional inventory. Appraisals though are supposed to look at comparable homes, and take into account if the homes were sold under duress. A house or two in the neighborhood that either was foreclosed on, or sold much lower because the owner needed out should not impact an appraisal very much. Those are one off deals and do not reflect the market as a whole.
> Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their house foreclosed on, the value of your home will go down.
Surely the lower valuation on your home is incorrectly low, though? Or is there some actual reason why buyers would want it less?
Surely the lower valuation on your home is incorrectly low, though? Or is there some actual reason why buyers would want it less?
It is a supply and demand problem. Your house is only worth what someone will pay for it. If the potential buyers have several cheaper foreclosed homes to buy instead of your home, the potential sale price of your home will go down
The banks use "comps" to figure out the maximum loan value. Assuming the housing nearby as similar, their actual sale price provides the price signals markets crave.
Comps have nothing to do with loan value. Your income, credit, and assets and debt decide what your max loan value is.
Well, my response was to a statement that has been edited :/
your financing can be denied if the house doesn't appraise, depending on your deal with your lender
And while the appraisal is supposed to be independent, the appraiser knows the contracted sale price of the house at the time of the appraisal.
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Because the market is flooded with similar houses for cheaper.
> Foreclosed homes naturally have
> a lower value than non-foreclosed
> homes
I don't think the statement you're quoting is correct, however, they do tend to have a lower value. Here are some reasons:
- Buying a foreclosed home is much more arduous due to bank processes, decreasing demand.
- Foreclosed homes tend to be in worse shape. The owners may not have had the means or desire to maintain after realizing they would eventually lose the home.
- Buying a foreclosed home is much more arduous due to bank processes, decreasing demand.
- Foreclosed homes tend to be in worse shape. The owners may not have had the means or desire to maintain after realizing they would eventually lose the home.
You forgot the incentives for the seller. A home sale is likely the biggest transaction that most people are ever involved in. A traditional seller is more likely to hold off for the right buyer or price. For a bank, it is just one of many transactions. They are less likely to hold out for a specific price and will be happy to sell for 90 cents on the dollar to simply move on to the next transaction.
>I don't think the statement you're quoting is correct, however, they do tend to have a lower value.
I am curious why you say that quoted section was incorrect when you seem to agree that the value of foreclosed homes is lower.
>I don't think the statement you're quoting is correct, however, they do tend to have a lower value.
I am curious why you say that quoted section was incorrect when you seem to agree that the value of foreclosed homes is lower.
I thought "naturally have a lower value" implied that there is something about foreclosure itself that reduces the value of a home. I don't think this is true. Rather, I think that foreclosure is covariant with things that reduce the value of homes. So I wanted to clarify that point. That's what I meant by disagreeing with the quoted statement.
Ok, I guess that is just a question of semantics. I likely could have phrased it better but the underlying point still stands that an increase in foreclosed homes will lower the overall home value in an area for the reasons we both listed.
It also doesn't fit the real estate agents incentive structure so they don't show the foreclosed homes and thus less competition for purchase and thus lower price.
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Americans Hold Over $4.1 Trillion in Consumer Debt and Roughly $90.0 Trillion in Asset Wealth doesn't quite have the same ring to it.
Let's also keep in mind the population is still growing so just like the game of "Highest grossing movie of all time!" title you see every year, it's not surprising at all that total debt numbers are increasing. We need debt per capita to be alarmed.
The debt is real, the wealth not necessarily. But a more telling measure would be debt per capita or debt vs liquid assets. The financial crisis showed us that 20 trillion can be erased relatively quickly.
http://www.huffingtonpost.com/2013/02/14/financial-crisis-co...
The debt is as "real" as the assets. All it would take to erase a good chunk of it is for people to stop paying or for significant inflation to occur, among many other possibilities.
Edit: I'm not trying to suggest some kind of Fight Club-esque reorganization of society's financing structures. I'm just talking about the way that debt tends to get fractionally charged off when it goes to collections.
Edit: I'm not trying to suggest some kind of Fight Club-esque reorganization of society's financing structures. I'm just talking about the way that debt tends to get fractionally charged off when it goes to collections.
I wonder what the NCAV of the US is?
You are conflating consumer debt, i.e., hold by consumers, with asset wealth, which is hold mostly by corporations and their owners. The first is usually carried by the poorest part of the population, since rich people have little need for consumer debt.
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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.
Not sure why OP was being downvoted. I just bought a new truck, financed mostly with an auto loan. I couldn't remember or provide half the information required for the loan application and was told "don't worry about that." I still got approved.
Another story, I recently changed rental apartments. My "credit report" was a page I printed out from a consumer credit reporting site, where I could've changed any data.
My point being, all this loose validation seems very remiscnet of the easy money that was so common pre-Great Recession.
Another story, I recently changed rental apartments. My "credit report" was a page I printed out from a consumer credit reporting site, where I could've changed any data.
My point being, all this loose validation seems very remiscnet of the easy money that was so common pre-Great Recession.
Not even in the same ball park as 2008. Auto loans are a lot easier to recover than a home loan. If you don't pay your auto loan they just come pick up the car. Then they get to resell the car again. This is completely different than a home loan in both value, and the process for the lender recover the collateral.
Home loans right now are still very tight. I had to provide more documentation for a simple refi with the same bank, than I had to provide in 2011 when I purchased the home. When I asked why, they responded that regulations have continued to tighten since them.
When dogs can get a 500k home loan and then sell the house a month later for 600k I might start believing we are back in 2008.
Home loans right now are still very tight. I had to provide more documentation for a simple refi with the same bank, than I had to provide in 2011 when I purchased the home. When I asked why, they responded that regulations have continued to tighten since them.
When dogs can get a 500k home loan and then sell the house a month later for 600k I might start believing we are back in 2008.
Same experience for me on a recent car purchase. Dealer didn't particularly want a down payment, which made me suspect that they are being comped on loan volume when financed through manufacturer, a choice I opted for because the % was 2 points lower than my bank.
Cheap money is vital to the economy. I know that the market is different in the EU but look at what is happening in Germany and Greece. You would not want that.
massive endemic fraud is not vital to the economy... although it is vital to destroying an economy.
Vital to an unstable, bubble prone economy. Long-term sustainability is not enhanced by cheap money. What we want is clever money.
also "subprime financial products bundled together and resold as low-risk investments to massive institutions" combined with "moral hazard" of said institutions knowing they will be bailed out again by the taxpayers when the speculative bubble bursts.
also Student Debt cannot be forgiven in bankruptcy so you essentially have an entire generation of indentured servants who will never actually own property outright.
also Student Debt cannot be forgiven in bankruptcy so you essentially have an entire generation of indentured servants who will never actually own property outright.
>also Student Debt cannot be forgiven in bankruptcy so you essentially have an entire generation of indentured servants who will never actually own property outright.
This is an issue, but can vanish with the stroke of a pen.
This is an issue, but can vanish with the stroke of a pen.
A pen being wielded by a man with no desire, or knowledge, or forethought, to do so.
You are forgetting that if large enough section of the population is wronged/backed into a corner, they are going to protest/rise/riot. It certainly seems to be heading that way...I would be seriously worried if I were one of these student loan companies that are giving loans to people with no prospect of getting paid back.
Student loans are now almost entirely held by the taxpayer.
More likely we'll see more forms of non-dischargable consumer debt. This is debt which is not discharged when someone declares bankruptcy.
Every time you hear a politician advocating more student loans (rather than more affordable higher ed), one of the reasons they do this is because student loans are non-dischargeable.
Think about someone who is 18 and takes on lots of debt. There would be very little reason not to declare bankruptcy, and just live off of wages for 5-7 years until the bankruptcy is cleared from his/her credit report.
With the housing crisis, most debtors also owned some equity in the house, which was a massive incentive not to foreclose, yet many still did.
But with consumer debt there is no downside. You can just choose not to pay it. The collections industry uses some marginally-illegal tactics to create personal embarrassment, but that's where it ends.
With an auto loan the car can be repossessed, but you can pay your rent using a credit card or buy a new TV every few months and if you fail to pay back the debt nobody is going to force you to give up those items. As with education, once the money has been used nothing the creditor does can take away the item, which is why the debt had to be made non-dischargeable.
I think we can look forward to a new class of non-dischargeable consumer debt which will initially be sold via lower interest rates, but will become the sort of debt that college campus credit card pushers will mainly be slinging.
There is really no political opposition to this anymore, now that both parties are so strongly aligned with the finance industry.
I'd also expect to see the credit report become something somewhat more like a "trust dossier" that would routinely be viewed by employers and other entities we all work with who do not typically view the data, and would include things like TSA precheck status, IRS timely filing information, immigration status, etc.
There's a reason debtors prisons used to exist, which is that the human optimism that can get us through great hardship can also tend to lead many humans to be overly optimistic about their ability to repay debt. It takes a very firm hand to create compliant borrowers. In the US, the older generation views missing a credit card payment as a really big (and embarrassing) deal, but the younger generation does not care as much about this.
The occupy movement was a backlash against the shackles of student debt, but was shut down relatively efficiently. The next iteration has fewer principled objectors but a lot more debt cynics who view consumer debt more as something to be exploited.
Every time you hear a politician advocating more student loans (rather than more affordable higher ed), one of the reasons they do this is because student loans are non-dischargeable.
Think about someone who is 18 and takes on lots of debt. There would be very little reason not to declare bankruptcy, and just live off of wages for 5-7 years until the bankruptcy is cleared from his/her credit report.
With the housing crisis, most debtors also owned some equity in the house, which was a massive incentive not to foreclose, yet many still did.
But with consumer debt there is no downside. You can just choose not to pay it. The collections industry uses some marginally-illegal tactics to create personal embarrassment, but that's where it ends.
With an auto loan the car can be repossessed, but you can pay your rent using a credit card or buy a new TV every few months and if you fail to pay back the debt nobody is going to force you to give up those items. As with education, once the money has been used nothing the creditor does can take away the item, which is why the debt had to be made non-dischargeable.
I think we can look forward to a new class of non-dischargeable consumer debt which will initially be sold via lower interest rates, but will become the sort of debt that college campus credit card pushers will mainly be slinging.
There is really no political opposition to this anymore, now that both parties are so strongly aligned with the finance industry.
I'd also expect to see the credit report become something somewhat more like a "trust dossier" that would routinely be viewed by employers and other entities we all work with who do not typically view the data, and would include things like TSA precheck status, IRS timely filing information, immigration status, etc.
There's a reason debtors prisons used to exist, which is that the human optimism that can get us through great hardship can also tend to lead many humans to be overly optimistic about their ability to repay debt. It takes a very firm hand to create compliant borrowers. In the US, the older generation views missing a credit card payment as a really big (and embarrassing) deal, but the younger generation does not care as much about this.
The occupy movement was a backlash against the shackles of student debt, but was shut down relatively efficiently. The next iteration has fewer principled objectors but a lot more debt cynics who view consumer debt more as something to be exploited.
Defaulting isn't a big deal even to the banks. They can just price it into the product.
What would be interesting though would be credit offerings, cards for instance, that are not dischargable, but with better terms or interest rates.
My concern though is mandating classes of debt as non dischargable by law, banks wont necessarily pass the savings along to the customer, so the laws should allow certain types of debt to be dischargeable but subject to your agreement with the bank. So you get a non dischargeable card at 2 pts less than the normal one.
What would be interesting though would be credit offerings, cards for instance, that are not dischargable, but with better terms or interest rates.
My concern though is mandating classes of debt as non dischargable by law, banks wont necessarily pass the savings along to the customer, so the laws should allow certain types of debt to be dischargeable but subject to your agreement with the bank. So you get a non dischargeable card at 2 pts less than the normal one.
> Defaulting isn't a big deal even to the banks.
True, but the ceiling on the amount that can be loaned to a person is limited by the market-driven interest rate for packages of dischargeable debt.
> not dischargable, but with better terms or interest rates
Yes, I think we'd see aggressive refinancing offers and all sorts of other semi-dark patterns... which would be irrelevant to the 98% who don't declare bankruptcy, but likely quite life-changing to those who do.
True, but the ceiling on the amount that can be loaned to a person is limited by the market-driven interest rate for packages of dischargeable debt.
> not dischargable, but with better terms or interest rates
Yes, I think we'd see aggressive refinancing offers and all sorts of other semi-dark patterns... which would be irrelevant to the 98% who don't declare bankruptcy, but likely quite life-changing to those who do.
There are debt forgiveness programs like PSLF that I expect to become wildly more popular in the future. We're only ever a Presidential election away from dramatic changes to student loan treatment.
And with that the risk of the permanent destruction of the market for student lending in the future, meaning college will go back to being a upper-class game.
There is no "market" for (undergraduate) student loan lending any longer, AFAIK. The whole shebang is run by the Department of Education.
If there wasn't so much student-loan money available, would there be more incentives for some colleges to reduce their costs and make their product more affordable.
Right now, colleges provide the service (education) and credential (degree). If independent third parties could provide believable credentials, there would be more incentives to find cheaper ways of delivering the services.
Right now, colleges provide the service (education) and credential (degree). If independent third parties could provide believable credentials, there would be more incentives to find cheaper ways of delivering the services.
Exactly, I think another way of describing this is a bubble.
Does America really have low wages? Granted, the lack of a minimum wage is crazy, but the median household income is $56k. Compare that to £23k in the UK.
You are comparing pre-tax income (USA) and post-tax (UK)! You also mixed your units. TO use net-adjusted disposable income, USA has 41k USD and UK 28k USD. Also, you'd need to adjust for the benefits you get from your government/employer (Health insurance) for a fair comparison. While American workers earn more than UK workers, that does not necessarily imply that the total cost of employment for UK employers is lower than total cost of employment for USA employers. I don't have that data handy.
> you'd need to adjust for the benefits you get from your government/employer (Health insurance) for a fair comparison
Indeed. My out of pocket for medical care this year is $19k (and that's with one of the "gold" plans)
Indeed. My out of pocket for medical care this year is $19k (and that's with one of the "gold" plans)
But how much is it compared to your salary? I pay 33% of my income just for Healthcare. Or well, government just takes it :)
A lot of people don't have guaranteed retirement benefits, education is expensive and sickness can cost you a lot of money any time. When things go well you can live well in the US but things can go bad quickly.
That's also true in many other developed nations in regards to education, such as Canada, Japan and Britain, which have between moderately and very expensive education systems. Britain for example now has arguably the most expensive university costs:
https://www.theguardian.com/education/2015/nov/24/uk-has-hig...
"Britain has the world’s most expensive public university tuition fees, surpassing the average in US equivalent institutions. While student fees can be higher at many ivy league and other top colleges, the £9,000 annual charge for attending an English institution pushed the British average above the US’s public colleges for the first time, the Organisation for Economic Cooperation and Development said."
http://www.ft.com/intl/cms/s/0/62a1d4e0-9213-11e5-bd82-c1fb8...
https://www.theguardian.com/education/2015/nov/24/uk-has-hig...
"Britain has the world’s most expensive public university tuition fees, surpassing the average in US equivalent institutions. While student fees can be higher at many ivy league and other top colleges, the £9,000 annual charge for attending an English institution pushed the British average above the US’s public colleges for the first time, the Organisation for Economic Cooperation and Development said."
http://www.ft.com/intl/cms/s/0/62a1d4e0-9213-11e5-bd82-c1fb8...
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Wages aren't doing so hot vs cost of living, and they're quite bad vs productivity. If we're better off than other developed nations, that's a dubious consolation.
We have a minimum wage. It's $7.25/hr at the Federal level, so that's the baseline.
I don't know why you're being downvoted, this is accurate.
The idea that this was ever downvoted at all is very strange. What is happening to HN?
[deleted]
One man's debt is another man's financial asset.
Yes but those assets are owned by the rich. I'd wager increased debt correlates strongly with increased inequality.
Those assets, if you're referring to consumer debt, are owned by anyone with a retirement account (or pension) with financial sector stocks in it. Considering that just about any diversified portfolio probably has a broad based US equity portion, that is probably the majority of employed people.
I think you may be overestimating the number of employed people who are invested in the markets to any real degree.
The increase of consumer debt is directly correlated with wage stagnation. Someone in the 70s or 80s wages started to grow and access to loans was made easier.
With this attitude, you might as well just give all your money to the bankers now and just be done with it.
>With this attitude, you might as well just give all your money to the bankers now and just be done with it.
With what attitude? Having knowledge of accounting, and that the balance sheet has two sides?
If anything, ignorance of finance is how you give your money to the bankers.
With what attitude? Having knowledge of accounting, and that the balance sheet has two sides?
If anything, ignorance of finance is how you give your money to the bankers.
> If anything, ignorance of finance is how you give your money to the bankers.
I don't think it's quite that simple. It's probably some combination of a number of factors such as:
I don't think it's quite that simple. It's probably some combination of a number of factors such as:
* Inability to control one's spending
* A consumer-driven culture where status is equated with material possessions
* Availability of easy credit
* Society not recognizing compulsive spending as an addiction... and it's gone
which is the taxpayers "troubled asset" which has to go into a "Relief program" which somehow translates into Socialism for the hyper-rich and indentured servitude for everyone else.
when you default you lose your home, when they default they get a trillion dollar cheque from the government, and 10 million dollar performance bonus.
Not necessarily, thanks to "leverage".
Honest question here, does this actually matter anymore? Do economists see it as a positive, negative or neutral thing?
When I hear about debt that big I wonder if $4.1T even a real thing. I mean is it a tangible number that actually represents something of real substance?
When I hear about debt that big I wonder if $4.1T even a real thing. I mean is it a tangible number that actually represents something of real substance?
Yes, it's real. Lenders have computers that sum lots of accounts; they're expected to do that and disclose how much they've lent.
$4.1E12 isn't really that difficult to relate to. Just amortize it across the US population of 325 million. That's $12,612 per citizen. It's also about one year of Federal spending.
It's a negative thing. Both individual debt load the and the rate of delinquency has been increasing, with student debt being the worst of these; if you can fog a glass you can make the Federal government send money to some school against your future earnings. There is probably no form of debt easier to assume in the US and upon this river of money floats a horde of careers, bonuses, pensions, endowments and gold plated benefits for The Great and The Good of academe, which makes questioning the value of it all a political third rail.
What do economists think? They're watching the bubble grow and devising ever more contrived ways to pretend it's not a bubble.
$4.1E12 isn't really that difficult to relate to. Just amortize it across the US population of 325 million. That's $12,612 per citizen. It's also about one year of Federal spending.
It's a negative thing. Both individual debt load the and the rate of delinquency has been increasing, with student debt being the worst of these; if you can fog a glass you can make the Federal government send money to some school against your future earnings. There is probably no form of debt easier to assume in the US and upon this river of money floats a horde of careers, bonuses, pensions, endowments and gold plated benefits for The Great and The Good of academe, which makes questioning the value of it all a political third rail.
What do economists think? They're watching the bubble grow and devising ever more contrived ways to pretend it's not a bubble.
Thank you for the response!
I've actually been thinking about the implications of student debt for a while and it seems like a really terrible thing for a lot of reasons. I think it sucks people are forced into jobs they probably wouldn't otherwise do, just to pay off some debt.
The only thing I'll say about your response is that, I frequently hear about "the bubble getting ready to burst", but it never seems to happen. Similar to radical increases in housing prices, they seem to just keep rising, contrary to economists predictions about a crash. It's a totally anecdotal observation, but it's the reason I asked the question in the first place.
I've actually been thinking about the implications of student debt for a while and it seems like a really terrible thing for a lot of reasons. I think it sucks people are forced into jobs they probably wouldn't otherwise do, just to pay off some debt.
The only thing I'll say about your response is that, I frequently hear about "the bubble getting ready to burst", but it never seems to happen. Similar to radical increases in housing prices, they seem to just keep rising, contrary to economists predictions about a crash. It's a totally anecdotal observation, but it's the reason I asked the question in the first place.
>> forced
There is no force involved; please maintain perspective. There are no debtors prisons filled with 20-something Berkeley graduates. Every penny of every student loan was voluntarily assumed by the debtors. The terms for much of this debt allow payments to be deferred based on income. The average amount of student debt being carried is typically less than the cost of a new car. We deal here with "first world problems."
>> but it never seems to happen
2008? TARP? "Great Recession"?
It clearly registers on every measure of economic activity I've seen. Rather hard to miss, really. You can have a look and the 07-08 collapse of property values over here if you missed it:
https://en.wikipedia.org/wiki/United_States_housing_bubble#/...
There is no force involved; please maintain perspective. There are no debtors prisons filled with 20-something Berkeley graduates. Every penny of every student loan was voluntarily assumed by the debtors. The terms for much of this debt allow payments to be deferred based on income. The average amount of student debt being carried is typically less than the cost of a new car. We deal here with "first world problems."
>> but it never seems to happen
2008? TARP? "Great Recession"?
It clearly registers on every measure of economic activity I've seen. Rather hard to miss, really. You can have a look and the 07-08 collapse of property values over here if you missed it:
https://en.wikipedia.org/wiki/United_States_housing_bubble#/...
For lots more data and charts, see New York Fed's quarterly report on household debt and credit:
https://www.newyorkfed.org/medialibrary/interactives/househo...
Page 13 shows newly delinquent balances by loan type, and the trend doesn't seem too worrying. Page 11's "total balance by delinquency status" also seems to be heading in a good direction.
https://www.newyorkfed.org/medialibrary/interactives/househo...
Page 13 shows newly delinquent balances by loan type, and the trend doesn't seem too worrying. Page 11's "total balance by delinquency status" also seems to be heading in a good direction.
What happened to bankruptcies in 2006? They dropped significantly.
Debt is money. Money is debt. You borrow money and it's fresh new money, expanding the money supply. If everyone pays back their debts, then (nearly) all of the money is gone.
You don't have $1000 in your checking account. You have an IOU from the bank for $1000. You can then 'spend' the money by transferring the IOU to someone else. But it is never guaranteed transferable for something real. It relies on everyone else believing the $1000 has value, which they do, so you are OK.
You don't have $1000 in your checking account. You have an IOU from the bank for $1000. You can then 'spend' the money by transferring the IOU to someone else. But it is never guaranteed transferable for something real. It relies on everyone else believing the $1000 has value, which they do, so you are OK.
My favorite is government budget deficits. Take for example Medicare and drugs. Where does the money Medicare use to buy drugs comes from.
The trend is probably more important than the total. A single debt amount can be “OK” for one person but practically sink another person.
The rate of bank-related expenditures should be measured instead. Add up all the ridiculous overdraft fees, the interest payments, changes in rates due to an ARM, etc. and one person’s financial picture could look quite a bit different than another for “the same debt” amount.
The rate of bank-related expenditures should be measured instead. Add up all the ridiculous overdraft fees, the interest payments, changes in rates due to an ARM, etc. and one person’s financial picture could look quite a bit different than another for “the same debt” amount.
Secured on wasting assets, the promise of future earnings, or nothing at all. What could possibly go wrong?
(On the bright side this is far from the majority of debt.)
(On the bright side this is far from the majority of debt.)
>What could possibly go wrong?
Americans are the wealthiest people in the history of mankind. Fortunes ebb and flow, but there isn't much to worry about.
Americans are the wealthiest people in the history of mankind. Fortunes ebb and flow, but there isn't much to worry about.
Depends on your definition of wealth. Defined as "amount of time you could survive with no income", most Americans (including many in the HN crowd) aren't very wealthy at all.
Only if they insist on keeping their current (very high compared to most people in history) standard of living. A median American could survive at the standard of living of a medieval peasant indefinitely on their current assets.
Yes, but it would require one to possess a marked fondness for worms.
The number is 12+T when you factor in mortgage debt which should be factored in.
http://www.zerohedge.com/news/2017-02-16/us-household-debt-r...
http://www.zerohedge.com/news/2017-02-16/us-household-debt-r...
See also: http://www.calculatedriskblog.com/2017/02/ny-fed-household-d...
(For some more analysis)
(For some more analysis)
Here's a few things that could ease student loan debt: make the interest rate less, use SS paid into while in college towards college, simplify all the federal student loans, etc.
Seriously... I'm going to die before I get to use any SS...
IMO, the biggest problem with so much debt is the amount of interest embedded in the agreement of it all. Let's say that the average interest rate is 4% and that none of the debt is double counted, e.g. one debt leading back to another debt at a different interest rate. The total interest revenue on the debt is $161 billion dollars. Where does that money come from?! It needs to pop up out of thin air, like someone needs to print it.
If there is a question of why, I will explain. It is the same explanation I give to a banking specialist for my refusal to accept a savings account. Take a village of 100 people; the entire village has no money whatsoever, so they cannot trade or buy food or sell goods and services. A rich man lives on the top of a mountain and decides to lend a $100 to the entire village, which is $1/person, at an interest rate of 5%, and the entire debt is to be paid back in exactly 1 year.
For the duration of that year, villagers are beginning to buy and sell, the economy is created and is moving healthily, villagers are working, products and services are being created, sold, and consumed. At the end of the year, $105 need to be paid back, but the entire amount of money in the entire village adds up to just a $100. Where does that $5 come from?
Some villagers will have accumulated more than $1 and they will be able to pay back their debts and have some left over. But then also some villagers will have nothing. What do they lose? How do they fulfill their debts?
The entire system relies on the introduction of additional money from somewhere. If so, then that entity loses money. This system is deeply toxic and works contrary to the one who borrows. And once all is added up, the net result is all money is removed from the system. Losers lose big. Winners hit net zero eventually.
If there is a question of why, I will explain. It is the same explanation I give to a banking specialist for my refusal to accept a savings account. Take a village of 100 people; the entire village has no money whatsoever, so they cannot trade or buy food or sell goods and services. A rich man lives on the top of a mountain and decides to lend a $100 to the entire village, which is $1/person, at an interest rate of 5%, and the entire debt is to be paid back in exactly 1 year.
For the duration of that year, villagers are beginning to buy and sell, the economy is created and is moving healthily, villagers are working, products and services are being created, sold, and consumed. At the end of the year, $105 need to be paid back, but the entire amount of money in the entire village adds up to just a $100. Where does that $5 come from?
Some villagers will have accumulated more than $1 and they will be able to pay back their debts and have some left over. But then also some villagers will have nothing. What do they lose? How do they fulfill their debts?
The entire system relies on the introduction of additional money from somewhere. If so, then that entity loses money. This system is deeply toxic and works contrary to the one who borrows. And once all is added up, the net result is all money is removed from the system. Losers lose big. Winners hit net zero eventually.
Thus, $4.1 trillion in consumer debt works out to $12,638 per person.
The Gross Domestic Product (GDP) in the United States was worth 18036.65 billion (about $18 trillion) US dollars in 2015. That is about $55,424 per person.
Note that the "consumer debt" is divided into several categories.
Student loans represent a long term investment and may be reasonably paid off over decades.
Auto loans are typically paid off in 3-5 years.
Ideally, credit card debt should be paid off immediately. It is difficult to evaluate credit card debt because credit cards have increasingly become the substitute for cash in the United States. How much of the debt is extremely short term and essentially represents what used to be cash transactions?
What is "other" consumer debt -- payday loans? IOU's?
The point is that $4.1 trillion in consumer debt in a nation with over 300 million people and a GDP over $18 trillion per year is neither unreasonable nor a crisis, particularly when that debt includes longer term items such as auto loans and student loans.