[HN Gopher] How I think about debt
___________________________________________________________________
How I think about debt
Author : pmzy
Score : 153 points
Date : 2024-05-06 13:04 UTC (9 hours ago)
(HTM) web link (collabfund.com)
(TXT) w3m dump (collabfund.com)
| pif wrote:
| TL;DR: having tons of cash is better than having debt.
| falcolas wrote:
| I thought the "The more debt you have, the less financially
| resilient you are" was the more important message.
| mym1990 wrote:
| But this isn't true, one has to consider the debt ratio, not
| just the debt. Someone with a million dollars of debt is
| financially resilient if they have a debt ratio of .1
| vlunkr wrote:
| True, but that is not the situation most of humanity is
| facing.
| necovek wrote:
| I read that as an example to illustrate a point: it could
| also have said debt of $1000 with a debt ratio of 0.1
| which is still pretty resilient.
| falcolas wrote:
| Resilient? Sure. Realistic for anyone with only $10k in
| assets? Not even remotely. Not in the market we have
| today. There are too many people who are using debt
| _just_ to get their basic needs met, let alone something
| with enough permanence to be considered an asset.
| mym1990 wrote:
| We're just using arbitrary numbers to demonstrate a
| point, we aren't trying to assess anyone's _actual_
| financial health.
| mym1990 wrote:
| That was exactly my point...a million dollars of debt is
| astronomical for the majority of people, but adding
| another data point such as DTA or DTI would make for a
| clearer picture of what the debt load actually is. Its
| like putting down a 100kg kettle bell and asking a group
| of people "is it hard to lift"? For the average person
| sure...but you're going to get a variety of answers if
| you put that kettle bell in front of kids vs a group of
| gym rats.
|
| Edit: I guess a smaller amount like 10k USD might be
| better to illustrate the point.
| leononame wrote:
| That's only true if the rest of their bet worth isn't tied
| up in some high risk investment where they could lose
| everything. Just because it's financially more optimal to
| have some debt in some situations doesn't mean that it's
| also more resilient. Yes, debt ratio plays a role (although
| a debt ratio of 0.1 is almost like having no debt at all),
| but no debt is for sure more resilient than debt.
| mym1990 wrote:
| I think my point was more that 1 million dollars of debt
| is a pretty large sum to most people, but not much to
| someone who has substantial assets. You can draw up
| "that's only true" scenarios on basically any situation,
| so its not very helpful to go back and forth.
|
| I will say the point about having debt limits your future
| possibilities is very true, and if someone would like to
| maintain an open future, stay away from large amounts of
| debt(homes, expensive cars, boats, etc...)
| triceratops wrote:
| Debt to income or debt to asset is the only way of
| evaluating if someone's debt is high or low. I thought it
| was obvious that's what GP meant.
| mym1990 wrote:
| I did not get that assumption from "The more debt you
| have, the less financially resilient you are". Debt is an
| absolute value, and debt-to-asset ratio is...not. You can
| also evaluate debt loads by debt-to-income ratio, which
| is not to be overlooked as most homeowners buy homes
| based on their income, rather than their savings. As
| others have said, debt-to-asset is also not a golden
| ratio, because if your assets are not liquid and you get
| called for your debt, you still have a bad situation.
| phkahler wrote:
| If your other millions are not liquid then the one million
| of debt is still a potentially significant liability when
| adverse events happen. If it _is_ liquid then why bother
| borrowing for something so small? The spent cash can be
| replenished quickly when there are no debt payments.
| mym1990 wrote:
| Very true, I think the article is pretty high level, and
| so are my comments. Actual financial health can be
| difficult to evaluate given that world events are pretty
| open ended and anything can happen.
| mym1990 wrote:
| Having both can often be the ideal situation. It's also really
| dependent on what the debt is, how is it being serviced...etc.
| For some people, not having any debt at all is extremely
| liberating, and that benefit outweighs any of the benefits of
| getting marginal returns.
| coopertyme wrote:
| >For some people, not having any debt at all is extremely
| liberating
|
| Indeed. I lived with my parents into my 30s, saved up for ~10
| years and bought a nice house cash, no mortgage. Was it
| financially optimal? Probably not, but the peace of mind of
| being immune to market crashes or interest hikes (we tend to
| not have 20+ years fixed mortgages here) is just really nice.
| sssilver wrote:
| You simply restructured your debt and borrowed from parents
| instead, no?
|
| That is to say, you owe them for those ten years.
|
| Not saying there's anything wrong with it. Most people in
| average circumstances owe a lot to their parents.
| phkahler wrote:
| >> You simply restructured your debt and borrowed from
| parents instead, no?
|
| >> That is to say, you owe them for those ten years.
|
| To me that seems like a strange take on it. I saw no
| indication of a debt owed in the GPs comment.
| bryanlarsen wrote:
| I think the OP used "owe" in the second dictionary sense:
|
| 2: to be attributable an idea that owes to Greek
| philosophy
| mym1990 wrote:
| This is a very transactional view of it, but I can see
| the line of thinking. My mom gave me everything I needed
| to succeed as an adult, and I owe her a lot, so now
| whatever she needs, I try to take care of it. Hopefully
| other people come to the same conclusion, but I don't
| think parents usually expect a financial ROI on raising
| kids haha.
| tombert wrote:
| I don't think all debt is equal, and I don't think all debt hurts
| your ability to handle volatility.
|
| I have a 30 year mortgage on my house with a 2.75% interest rate.
| That has effectively given myself "rent control"; outside of a
| potential rise of property taxes, my "rent" payment will not
| exceed a certain number of dollars. That means that if the
| housing prices rise rapidly, I'm covered.
|
| If I had decided not to leverage several hundred thousands of
| dollars of debt, then yes I'd have more cash directly now, but I
| might have suffered the fate that lots of others faced with the
| recent spikes in rent that have happened due to COVID. I simply
| didn't have to worry about that.
|
| Obviously there's different types of debt; some insanely high-
| interest loan you get from a payday loan place absolutely is a
| bad and will hurt your ability to stand volatility.
| galdosdi wrote:
| The way I think about this is:
|
| You already are in "debt" by being alive. You have the huge
| liabilities of needing food and housing and maybe sometimes
| some healthcare, in order to stay alive.
|
| By buying a perpetual source of one of those you aren't
| investing or expanding your liabilities-- just the opposite,
| you are hedging against and closing out your liability by
| prepaying for it. To take this idea further, this is why I
| think buying a little bit of stock in energy and agriculture
| companies is "risk free" because while they could go down if
| those things get cheaper, you would then win out as a consumer.
| You will need food and energy down the line anyway, so a modest
| investment in those closes out that hedge rather than expanding
| liability
| anon7725 wrote:
| There are lots of ways that stock in food and energy
| companies could go down while prices go up. A drought or
| pipeline disruption come to mind.
| yowlingcat wrote:
| Absolutely. And I think the same is true for the
| commodities market correlates there; if memory serves
| correctly, crude commodity futures went negative for a
| break period during the supply chain volatility spike
| during the beginning of the pandemic.
| vlunkr wrote:
| I tend to agree with Dave Ramsey on this point. A home loan is
| just about the only "good" type of debt for an individual to
| have. Because it tends to retain or gain value with little
| risk. He also recommends a 15 year loan instead of 30, which
| has been amazing for me.
| tombert wrote:
| I thought Dave Ramsey was pretty much completely wrong about
| student loan debt, at least if I remember his position on it
| being "you shouldn't have student loans".
|
| But I agree that most debt is probably bad to have.
| CalRobert wrote:
| It might be extreme but 15 years ago he was telling people
| not to be so flippant about taking on enormous amounts of
| debt for degrees with a questionable payback and I think he
| was right.
|
| I always thought the snowball method was dumb but as time
| goes on I can see how it makes sense psychologically, even
| if not mathematically.
| tombert wrote:
| Sure, I've said a few negative things about Ivy Leagues
| being overpriced here in the last few weeks, so I'm not
| saying you should necessarily get into $400,000 of
| student loan debt.
|
| What I didn't like about his take was that it also kind
| of also excluded getting into like $20,000-$40,000 of
| debt to go to a decent state school. That's a bad take;
| getting a degree (at least in a technical field)
| substantially increases your earning potential, and while
| $40,000 is a lot of money, it's not out of reach for
| virtually anyone working in tech or engineering or
| something adjacent, at least not in the US.
|
| I guess my frustration with his perspective is that it
| felt extremely reductive; he acts like the only student
| loan debt you can get into is Harvard-level stuff, but I
| think that's just not true, and not even the average
| case. Most people don't get into Harvard, (I think) most
| people who go to college end up at a state or local
| university, and as such they're not getting into the
| obscene levels of debt that you'd get from these yuppie
| private schools, particularly if they state within state.
| bluGill wrote:
| State schools are not ivy league expensive, but they are
| not cheap anymore.
|
| of course the degree matters. You pay about the same for
| art and engineering degrees but one will earn far more
| than the other.
| somenameforme wrote:
| You age is showing a bit with your post. Randomly picking
| Penn State you get annual costs of $60k+ for out-of-state
| and $40k+ for in-state. [1] The cost listed on the page
| is only for tuition/housing. Use the calculator to get
| estimates for everything else. And that's an anti-cherry
| picked example, as I wanted to avoid absurdly expensive
| places like California, but while also going for a well
| regarded school.
|
| You can _easily_ get well into the 6 figures of debt even
| at state schools now. You 'll find even rando state
| universities are hitting $30k+/year. Education costs have
| done exactly what you'd expect them to do when you
| convince people something is priceless and then give them
| unlimited and near unconditional loans to buy it.
|
| I don't really see the point in this when you can instead
| attend English language programs in e.g. Europe or Asia
| and pay less for your entire education than you'd pay for
| a semester at rando state school in the US. Do a work-
| study program and you could graduate with a tidy chunk of
| change saved up, instead of graduating buried in enough
| debt to buy a house.
|
| The ironic part is that this advice is even more
| pertinent for those coming from low income backgrounds,
| or from parents with limited education. But they're
| probably the people most unlikely to take advantage of
| such options, if not only because they probably just
| don't consider it.
|
| [1] - https://admissions.psu.edu/costs-aid/tuition/
| tombert wrote:
| Fair enough, but in fairness not all state schools are
| created equal. For example, at least one SUNY college
| (SUNY Empire) is only about $3,535 per semester (at least
| for tuition) for in-state [1], so assuming eight
| semesters roughly $30,000. I grew up in Florida, and the
| first college I went to was Florida State, and tuition is
| roughly $5,500 as of last year for in-state [2]. I feel
| like there are plenty of options for perfectly decent
| universities that fall roughly into that price range I
| specified in most states, so I think my point still
| stands.
|
| That said, I'm a huge fan of European/UK universities. I
| do graduate school in the UK, it's a lot cheaper than a
| comparable program in a lot of American universities.
| I've been trying to get my considerably-younger brother
| in law to consider applying to European schools.
|
| [1] https://catalog.sunyempire.edu/undergraduate/tuition-
| fees/#t...
|
| [2] https://admissions.fsu.edu/first-year/finances/
|
| ETA:
|
| Sorry, I didn't see the "housing" part of your first
| sentence. That certainly does make the costs add up,
| particularly if you stay in the dorms, which I think are
| kind of a scam in most schools. I think to save money, a
| lot of people would benefit from trying to stay with
| their parents a bit longer instead of partaking in the
| dorms.
| vlunkr wrote:
| > I can see how it makes sense psychologically, even if
| not mathematically
|
| He acknowledges this. It's about the psychological effect
| of seeing your list of debts grow smaller. I think a big
| part of his audience are people who have historically
| been very bad with money, which is why some of his advice
| seems strange to people who are already financially
| responsible. People with a bunch of maxed out credit
| cards and loans on ATVs and crap.
| muffinman26 wrote:
| I do think the snowball method also makes sense
| mathematically, depending on the loan terms and what
| you're optimizing for.
|
| If your loans have a minimum payment and a penalty for
| missing a payment above and beyond interest (which seems
| to be common for loans in the US), the snowball method
| gives you more flexibility. Paying off a loan completely
| eliminates that part of your monthly minimum payment.
|
| If in 2 or 5 years your income decreases unexpectedly
| (layoff, etc.), but by that point you've completely
| eliminated 1 or more loans, you're more likely to be able
| to continue making minimum payments.
| avgDev wrote:
| While I think Dave can be helpful for some, having 30 year
| old loan makes more financial sense if you are financed at
| 3%. You can pay it off sooner if you want.
|
| The further you get from the initial purchase date the dollar
| will have a lower value, and in theory you should be making
| more money.
|
| Plus, even tbills are returning over 5% and are state tax
| exempt.
| yowlingcat wrote:
| That's not always the case if you have a prepayment penalty
| on a mortgage (which isn't always the case but certainly
| something to watch for).
| avgDev wrote:
| Very uncommon in the US but one needs to do their due
| diligence.
| leononame wrote:
| I think the article still holds up. A financial crisis where
| you lose your job, a war causing deflation, a housing bubble
| bursting are all events that could lead to you paying _much_
| more than rent. If you can't pay, they'll take your house and
| everything else until they decide that the debt is paid. In
| case of a bubble bursting this can mean that you _still_ owe
| money after they took your house. This has happened to people.
|
| I also have a mortgage on my apartment and I also think it's a
| decent choice, especially considering that I'll have less
| income after retirement. But most people are only a couple of
| bad turns in life away of losing everything they own.
|
| All in all, I'd say the way to think this article presents does
| hold up to mortgage as well.
| dmoy wrote:
| > and everything else
|
| Unless you live in a no-recourse state, where they can't take
| everything else.
|
| In AZ, CA, TX, WA, and a handful of other states, banks can't
| go after your other assets, just the house that's mortgaged.
| trogdor wrote:
| Interesting. Do you know if mortgage rates in those states
| are higher, to compensate lenders for the increased risk?
| dmoy wrote:
| I think it matters a lot more for commercial mortgages.
| In any event, it's like 20-30bps or less according to the
| Fed. So higher, but not that much higher even for
| commercial mortgages, and even less for residential where
| there's a lot more federal protection going on.
|
| The bigger impact, I believe, is that housing prices can
| go more crazy. People will take more risk if they know
| they can walk and leave the bank holding the bag, so
| there isn't that limiting factor on prices.
|
| (Though I suspect, but obviously can't confirm, that the
| effect from non-recourse mortgage is absolutely dwarfed
| by other factors, especially out here on the west coast
| where we have very restrictive zoning policies,
| weaponized environmental policies inside urban areas,
| etc)
| mikestew wrote:
| WA resident: our mortgage is 2.5% from the credit union.
| I've not noticed that current rates are any worse than
| other states I've checked. OTOH, in 25 years of living
| here, I've never seen house prices go down, only stay
| steady.
| jp191919 wrote:
| Home prices definitely went down during the great
| recession.
| AstralStorm wrote:
| So did the wages, and those went down more. If you lost a
| job during that time, you're pretty screwed.
| PopAlongKid wrote:
| In CA, only the original mortgage used to buy your
| residence is non-recourse. If you refinance, the new
| mortgage is almost certainly recourse.
|
| There is also a similar process, non-judicial
| foreclosure[0], which is similar to non-recourse in some
| ways, but not for tax purposes (e.g. cancelation of debt
| income).
|
| [0]https://www.nolo.com/legal-encyclopedia/how-foreclosure-
| work...
| phkahler wrote:
| >> If you can't pay, they'll take your house and everything
| else until they decide that the debt is paid.
|
| This is new. Mortgages in the US traditionally took just the
| home as collateral. Thanks for the reminder that this is now
| a thing to look out for, as I may need to borrow one more
| time than I ever expected.
| Nifty3929 wrote:
| I think it's actually the reverse. The house is the only
| collateral, but traditionally you would still owe the
| deficit if the collateral couldn't be sold to pay off the
| whole loan. This is what's changed in recent decades. A lot
| (most? all?) primary-residence home loans in the US are
| non-recourse, meaning that you aren't liable for the
| deficit - you only lose the house.
| voisin wrote:
| > A lot (most? all?) primary-residence home loans in the
| US are non-recourse, meaning that you aren't liable for
| the deficit - you only lose the house.
|
| This is wild. In Canada not only do we all take interest
| rate risk every 5 years _maximum_ as we can't lock in for
| longer (which seems to make our whole society less
| robust), we can't refinance early if rates drop without
| massive penalties eliminating any incentive to do so, but
| all of our mortgages are full recourse.
|
| I can't believe how much worse this seems, on a societal
| level, than the US.
| anon7725 wrote:
| A couple of other good points vs Canada: most fixed-rate
| US mortgages don't have a prepayment penalty, and many
| offer the option to "recast", which means you can make a
| lump-sum payment and reamortize your loan while keeping
| the rate and end date the same. This has the effect of
| lowering your monthly payment and is often used as an
| alternative to refinancing if you're buying and selling a
| home in sequence.
| voisin wrote:
| Thanks for this. I'd never heard of this option and once
| again I am shocked at how much better Americans have it
| than Canadians when it comes to mortgages.
| tzoompy wrote:
| In Canada, it's actually worse than stated. You do have a
| prepayment penalty as long as current interest rates are
| lower than your loan's interest rate.
|
| Now that interest rates are higher than they were a
| couple of years ago, TD Canada Trust waived all my
| prepayment penalties. They were happy to let me prepay as
| much as I wanted.
|
| It's incredible how one-sided the Canadian system is.
| Prepayment is acceptable as long as the bank benefits.
| Prepayment is not ok when the person taking out the loan
| benefits.
| intuitionist wrote:
| I mean, manufacturing 30-year fixed rate fully pre-
| payable non-recourse mortgages does not happen in a free
| market. It takes a _lot_ of government subsidies to make
| that happen--in particular the government assumes the
| credit risk on something like 85% of US mortgages. The
| United States government is very into the idea of
| spending its resources to subsidize homeownership. Canada
| has made different policy decisions, like single-payer
| healthcare. If the societal choice was between universal
| healthcare and extremely borrower-friendly mortgages (and
| I don't think that it really works that way, at least not
| in such stark terms) I'm not sure I'd pick the mortgages.
| bluGill wrote:
| It can happen. There is risk, but the reward is very high
| and so it is worth it.
|
| However the government often will not allow you to get
| the full reward and so while the numbers work out for
| everhone in a free market it doesn't happen. adjustable
| rate mortgages in the us are lower interest rate. Often
| in the us they are a better deal - we are just looking at
| one case where everyone in a fixed rate two years ago is
| better off than those with adjustable rates.
| voisin wrote:
| > It takes a lot of government subsidies to make that
| happen
|
| No doubt, but the upside is a populace not especially at
| risk to interest rates which is absolutely crushing and
| systemically risky currently.
|
| > in particular the government assumes the credit risk on
| something like 85% of US mortgages.
|
| In Canada, CMHC does something similar so I am not sure
| we get away with anything special that the Americans are
| not.
| WalterBright wrote:
| I read my mortgage papers carefully before signing. I
| made sure there was no early payoff penalty.
|
| This worked out fine when interest rates dropped and I
| refi'd. I've refi'd many times whenever the interest rate
| dips :-/
| voisin wrote:
| In Canada? Who was your lender? I did an exhaustive (I
| thought!) search when I last got a mortgage and could not
| find a fixed rate option that did not have a large
| prepayment penalty.
| WalterBright wrote:
| In the US. I don't know much of anything about Canada.
| ckcheng wrote:
| > In Canada ... all of our mortgages are full recourse.
|
| Except in Saskatchewan and Alberta [1].
|
| [1]: https://financialpost.com/personal-
| finance/mortgages-real-es...
| AstralStorm wrote:
| That is just the mortgage. I assume that you also defaulted
| on media and anything else you had on credit, such as
| student loans.
|
| And those do not have such nice terms either.
| WalterBright wrote:
| > they'll take your house
|
| Yes, and they'll sell the house to cover the debt. But the
| amount they receive from selling the house in excess of the
| debt goes to you.
|
| I.e. you'll get the equity portion.
|
| It's in your mortgage contract. Worth reading.
| olddustytrail wrote:
| Yes but I think they're referring to negative equity.
| AstralStorm wrote:
| Unless you're backpaid enough so that they take equity in a
| penalty.
|
| And now you're homeless and with your equity you cannot
| acquire capital. Your credit is also tanked due to the
| default...
|
| Remember, most people do _not_ own multiple houses and
| having no stable address can really mess you up legally
| even.
| edmundsauto wrote:
| What would be different in this situation if the person
| were renting? Usually costs are similar per month for
| comparable places. I guess the down payment is a
| difference? But if you're that far in arrears on rent
| you're really still bad off...
|
| I don't feel convinced that having a mortgage debt is
| that much worse than not having one, if you lose your job
| and war and other bad things.
| tsimionescu wrote:
| If your house is still worth enough to cover the debt. If
| the sale of your house is not enough to cover it (which can
| happen if you bought during a bubble that burst), will your
| whole debt at least be forgiven?
| dmoy wrote:
| It's not forgiven, even in a non-recourse mortgage. So it
| can still e.g. hurt your credit score. They just legally
| can't pursue you for it.
|
| With a recourse mortgage, they can go through normal debt
| channels (including wage garnishment, etc).
| bluGill wrote:
| If there is a war you leave your house behind. If you rent
| you can save the difference in a foreign savings account.
|
| the point is there is alway risk and many different
| situations. depending on details there are different results.
| deadbabe wrote:
| Are you going to live in that house for 30 years? What's your
| plan when you need to move?
| coldpie wrote:
| Sure, why not? I can't speak for OP specifically, but
| generally living in the same house for decades is very
| common. I'm coming up on 15 years in my house with no plans
| to move, and most of my neighbors have been there even
| longer. My parents lived in the house I grew up in for 40
| years until my father passed away and my mom needed to
| downsize.
|
| In any case, if they move, then the price of the home they
| are selling will have gone up (or down) more or less the same
| as everyone else's, so it basically works out to a wash.
| tombert wrote:
| Even if I don't stay in the house for thirty years, it's
| still better as long as I stay for awhile. When I'm paying my
| mortgage payments, I'm building some degree of equity into
| the house, so the only "wasted" money is whatever I pay to
| interest.
|
| So my plan if I move is exactly what it sounds like: I sell
| the house and then buy a new one wherever I'm moving to. As
| long as I'm staying for like 5+ years at that location I
| think it's still worth it.
| psunavy03 wrote:
| The purpose of a 30-year fixed mortgage is to build up equity
| in a home you otherwise couldn't afford. If OP moves, they
| now only have to take on a smaller mortgage for their new
| home and then keep paying that new mortgage off.
|
| The goal is that by the time you reach retirement age, you
| have paid off the mortgage and own your home free and clear.
| Thus, you only have to pay the property taxes and have more
| financial security than someone who never built up equity
| because they always paid rent.
|
| Furthermore, if you have children, that home is potentially a
| source of generational wealth. They can sell it after you
| pass and invest the proceeds, or live in it themselves if
| they want. Worst case, if you find you didn't save enough for
| retirement, you can tap into the home equity to keep food on
| the table, although this is not optimal.
| pmg101 wrote:
| Isn't the common use case that the equity in your home can
| be exchanged for elder care in your latter years?
| psunavy03 wrote:
| Depends on the size of someone's nest egg. The goal
| should arguably be to use your other investments first.
| HeyLaughingBoy wrote:
| I might. I've lived in it for pretty damn close to 20 years
| at this point.
| francisofascii wrote:
| People don't realize how risky housing is compared to other
| investments. It is risky because it is SO MUCH MONEY and it is
| not diversified at all. If your house loses half its value,
| that represents hundreds of thousands in losses. And don't
| think that can't happen. You buy a penny stock for $2K and lose
| half, no big deal compared to your house. BUT, we need housing,
| we need a stable school for our kids, or a comfortable place
| for our partner, etc. So we have to take this risk.
| dehrmann wrote:
| If you ask a financial advisor for advice on investing half
| your net worth on 5x leverage in an liquid asset with one
| customer and one location, they'd think you're crazy.
| edmundsauto wrote:
| But most of them would not think you're crazy once it's
| specified to real estate. This means either financial
| professionals are blind to the similarities or there is
| something critical missing from your description.
| sokoloff wrote:
| When that one customer is "your family", it's a little bit
| different, though.
|
| PS: From context, I suspect you meant to say "illiquid
| asset".
| Tade0 wrote:
| > If your house loses half its value, that represents
| hundreds of thousands in losses.
|
| I never understood that part. Barring actual damage that
| would necessarily affect its worth it's still the same house.
|
| Or in other words: why should I care what others think my
| house is worth when I'm not selling, as I currently live
| there?
| fwip wrote:
| Well, you don't always know if you're going to want to sell
| later. Maybe you lost your job, maybe you need to move to
| another city, maybe you just hate the neighborhood.
| francisofascii wrote:
| Right, all it takes is for the large local employer to
| suddenly downsize, causing both the loss of job, and the
| crash of the local housing market simultaneously.
| roland35 wrote:
| Not just one employer, sometimes the entire industry goes
| down! Just look at the housing market in Detroit or
| Youngstown
| llukas wrote:
| Shouldn't this be priced into the house value in this
| local market?
| bobthepanda wrote:
| it usually isn't because banks are not all-seeing and
| cannot tell which local employer or industry is likelier
| to go bust. in that sense all metro areas are often
| equally risky.
| WalterBright wrote:
| > it's still the same house
|
| What a house is worth is what someone else will pay you for
| it. There is no intrinsic worth to it.
| Nevermark wrote:
| That isn't true.
|
| The marketplace valuation is just where individual
| suppliers' and demanders' valuations cross.
|
| The individual valuations are the foundational reality,
| or the market wouldn't work.
|
| Every time you buy, sell, or decline to sell or buy
| something, you are operating based on your own valuation.
| So there is nothing theoretical about it.
| WalterBright wrote:
| > That isn't true.
|
| People find out it is true when they try to sell
| something.
|
| > If you wouldn't sell your house for $1M, then it is
| worth $1M to you
|
| If you're willing to pay $1M for it, then it's worth that
| to you.
| schlauerfox wrote:
| A house has intrinsic worth. It is a house, people live
| in it, it provides shelter by it's nature as a house. How
| many dollars it's worth to others is extrinsic, but it
| certainly has intrinsic value.
| WalterBright wrote:
| > A house has intrinsic worth
|
| It's value is only what people will pay for it.
|
| For example, a relative of mine died some years ago. She
| had a house full of expensive furniture. You couldn't
| give that furniture away, even though it was in perfect
| condition. It had no value.
|
| The average estate value, excluding land, houses, and
| cars, is about $900. I have friends who ran an estate
| liquidation service. You'd net something like 5 cents on
| the dollar.
|
| This is one reason why I buy stuff at the thrift store. I
| bought a perfectly good chainsaw there for $10.
| Vegenoid wrote:
| You are thinking of worth and value only in the monetary
| sense, and the person you are responding to is referring
| to a house's ability to be valuable to individuals, even
| if nobody else will pay for it, because it provides them
| shelter, satisfying a basic necessity.
|
| This is most of where its monetary value comes from
| (obviously not universally true, many properties have
| simply become investments), and its monetary value would
| probably only completely evaporate if the house were so
| degraded that it could not function as a shelter.
|
| The monetary value of most houses is rooted in their
| ability fulfill a basic human need, as opposed to the
| monetary value of some other things, like gold or
| bitcoin, which are valuable primarily because of what
| they are worth to other people. Even if you disagree with
| using terms like 'worth' and 'value', you must agree that
| a house has utility that is not affected by its market
| price.
| krisoft wrote:
| > It's value is only what people will pay for it.
|
| If that is how you define it then by definition that is
| true. It is not the only possible definition though.
|
| In my world I prefer to sleep in a place where the rain
| doesn't fall on me. Having a place with a roof over me is
| value to me. If this meaning of the word "value" does not
| work for you then simply we are talking different
| languages.
|
| Perhaps try thinking about "how much would i need to pay
| to provide the same neccesity if I wouldn't own this
| place". Maybe that puts it into economic terms what we
| are talking here.
| Negitivefrags wrote:
| You care if you have a mortgage and you live in a non-US
| country where interest rates can actually go up to price
| you out of it.
| Tade0 wrote:
| You mean a situation where I could not afford the
| installments and therefore would be forced to sell it?
|
| In my corner of the world banks are required to assume a
| 2,5-5 percentage point buffer when calculating mortgage
| eligibility - the upper bracket is for variable interest
| rate mortgages. An unlikely scenario, but keeps the risk
| of what you mentioned low.
| glitchc wrote:
| No, it's far less risky to invest in housing. These two
| graphs over long term illustrate the difference in risk:
|
| Average home price since 1965:
| https://fred.stlouisfed.org/series/ASPUS
|
| Average Dow Jones index since 1919 [adjust scale to ~1965]:
| https://www.macrotrends.net/1319/dow-jones-100-year-
| historic...
| crooked-v wrote:
| Though it helps to keep in mind that returns there are
| because the US housing market has been distorted beyond all
| recognition by under-building that goes back to the civil
| rights era.
| jopsen wrote:
| You could also argue that there was population growth,
| and we might not see that in future.
|
| So under-building in the future will be harder, as houses
| exist.
|
| Of course, it's hard to know how population growth will
| work out in the future. And even harder to know how it'll
| work out in your neighborhood :D
| bobthepanda wrote:
| even without population growth, household size decline
| means that there will be more demand for housing, since
| the same amount of people divided by smaller household
| size = more households.
| aidenn0 wrote:
| Isn't the latter CPI adjusted, but not the former?
| glitchc wrote:
| Thank you for that, I forgot to mention it: Both
| inflation adjusted and log plotting need to be turned off
| (as checkboxes) for an apples to apples comparison.
| pdonis wrote:
| But your primary home isn't an investment, it's a necessity.
| You're going to live somewhere. The only choice you have is
| whether to buy or rent the place you live in. So that's the
| comparison that should be made. Comparing your primary home
| to your stock portfolio is pointless because you can't live
| in your stock portfolio.
|
| The GP is pointing out a key advantage of buying your primary
| home vs. renting: you're not exposed to the risk of rising
| rents. Others have pointed out disadvantages, such as being
| exposed to the risk of rising property taxes and rising
| insurance costs. How those things balance out is going to
| depend a lot on where your home is.
| WalterBright wrote:
| Houses have always been a lousy investment for me. Once you
| factor in all the costs (property tax, insurance, repairs, 6%
| real estate commissions, the time the house sits empty
| waiting for a buyer, etc.) the returns are not that good at
| all.
|
| Most people think: "I bought my house for $200,000 and sold
| it for $300,000, I made $100,000!!!!!" and neglect to do a
| proper accounting.
| Kirby64 wrote:
| Anyone buying a house with a mortgage generally is taking a
| 5:1 leverage (a 5% down loan is 20:1 leverage) position on
| the house. Making $100k on a $200k investment, with 5:1
| leverage means making 100k on a 40k investment, which isn't
| a 50% return... it's a 250% return. And it's tax free,
| assuming it's your primary residence (up to 250k cap
| gains). You have to spend an obnoxious amount on costs to
| not have it make sense.
| WalterBright wrote:
| Remember, leverage works both ways.
| Kirby64 wrote:
| Obviously. Which is why 20:1 leverage (5% down) is kind
| of foolish, since you can quickly become underwater on a
| house purchase if the value shifts. At 5:1 leverage
| though, you still maintain enough equity to weather any
| valuation swings if you have a need to leave and sell the
| house.
| temporarara wrote:
| While there is some "leverage" in mortgage, you actually
| need to pay the whole sum, and with interest too, so
| taking a $200k loan means you pay usually something like
| $250k for it in the end, and this means you have to make
| $50k profit to not lose. And houses age too. If the
| location is superb you can justify it as an investment,
| otherwise it's pure nonsense in every way. Thinking
| normal housing as an investment is one of those reasons
| why we can't have nice things.
| Kirby64 wrote:
| What do you think leverage means?
|
| If I take a leveraged position on a stock via margin
| trading and the stock goes to $0 (or, more realistically,
| it dips in value enough that I get a margin call) then I
| owe the whole balance, not just what I put up as capital.
| This is true of literally any leverage. And on top of
| that, I pay a margin rate in the form of an interest
| payment based on the amount of money I have outstanding
| beyond my capital. Sounds familiar, right? Because it's
| exactly identical. The only difference between a mortgage
| and a margin interest payment is that a mortage is
| amoritized across the term and is a fixed period, whereas
| margin interest is indefinite and acts more like a HELOC
| (i.e., you only pay interest on the amount that you have
| outstanding... and that amount can vary over time).
|
| I absolutely hate the idea that "paying X in interest
| means that's money you have to earn in addition to make
| it worthwhile". No, it's not. It's money you are paying
| to free up extra capital elsewhere that can be invested
| more efficiently. Unless you're spending well beyond your
| means (which, admittedly, some people do), then paying
| interest on a mortgage payment should mean making much
| much more elsewhere by investing money you would have
| spent on buying a house in cash.
| temporarara wrote:
| You HAVE to pay back your debt if you want to pocket all
| your profits. If your down payment is 25k and you buy
| 250k house, you need to borrow 225k for your "leverage".
| Now you get lucky and years later, AFTER you have paid
| 25k + 225k + interest + fees which amounts to at least
| 300k, prices have gone up and you can sell that house for
| 400k. Nice you think! I will make 375k profit just by
| investing 25k! NO, that's not how "leverage" works at
| all. At that point you have paid at least 300k to get
| 400k which makes not that great considering it's been 20
| years or so.
|
| The logic you are using is flawed beyond all reasoning to
| be honest. People who are in a position to both pay back
| their mortgages AND invest heavily elsewhere are already
| rich.
| Kirby64 wrote:
| You don't make 375k in profit off a 25k investment (in
| your example) if you sell a house for 400k. You would
| make 125k in profit using your numbers (minus fees,
| interest, etc). It's exactly how leverage works, and the
| equivalent in margin trading is 100% identical. The only
| difference with a mortgage is that you slowly deleverage
| yourself over time as a consequence of paying off the
| loan (principal that goes to value of the loan).
|
| As an example, if you sold a house 5 years into owning
| it, at current interest rates, you would only have paid
| down approximately 6% of the 30 year loan, so the
| 'leverage' of a 20% down loan would still be ~4.8:1.
| Dylan16807 wrote:
| What you're skipping in this equation is that the amount
| of leverage drops every month when you make your payment.
| The average leverage is a lot lower than the starting
| leverage. That's what makes a mortgage pretty different
| from a leveraged trade.
|
| > Unless you're spending well beyond your means (which,
| admittedly, some people do), then paying interest on a
| mortgage payment should mean making much much more
| elsewhere by investing money you would have spent on
| buying a house in cash.
|
| There's no free lunch. _Often_ , investments will get you
| a better return than your interest fees. Often they
| won't. And "much much more" is downright wrong.
| Kirby64 wrote:
| In today's 7% interest rates, yeah it's potentially a
| wash. In the era of 3-4% rates, it's free money. 'much
| much more' is absolutely correct at 3-4%, which a lot of
| people currently have mortgages at today.
| giaour wrote:
| The returns might look better if you factor in imputed rent
| (assuming this is your primary residence). There are
| definitely investments with higher growth, but the
| (untaxed!) imputed rent is solid income over the lifetime
| of the house.
| bluGill wrote:
| if you don't live there long term houses are a bad
| investment. Live in the same place for 20 years and it
| becomes much better.
| WalterBright wrote:
| Generally, to break even you've gotta stay at least 5
| years. The transaction costs of selling a house are
| enormous.
|
| Meanwhile, Microsoft stock is about 10x over the last 10
| years. Transaction costs are minimal. I can sell it on a
| moment's notice. I was paid dividends. No insurance
| costs, no property tax, no maintenance.
|
| I just had to replace the roof on my house. Wow, that was
| a whopping bill. The roofer told me if I'd delayed
| another year, the bill would have been a lot higher, as
| he would charge $150 per sheet of plywood replaced. As it
| was, only one was water damaged bad enough.
| bluGill wrote:
| you have to live someplace though. Over the 30 year life
| of that roof it is cheap enogh but that is a large one
| time cost if you only are there for 5 years.
| WalterBright wrote:
| Roofs are so expensive they factor heavily into what you
| can sell the house for.
|
| Asphalt shingle roofs are lucky to get 20 years, cedar
| shingles are even worse.
| rqtwteye wrote:
| "Meanwhile, Microsoft stock is about 10x over the last 10
| years. Transaction costs are minimal. I can sell it on a
| moment's notice. I was paid dividends. No insurance
| costs, no property tax, no maintenance."
|
| If you manage to pick Microsoft in 2014, Apple in 2000,
| Tesla in 2015 and BTC in 2010, you are definitely way
| better off not buying a house but keep renting.
| rqtwteye wrote:
| It depends on where you live. In CA renting is usually
| cheaper than a mortgage for the same property. Here in New
| Mexico my mortgage (2.6%) is cheaper than renting the same
| thing. With higher mortgage rates it's not that clear but
| it still looks favorable knowing that mortgage stays stable
| for the next 15 years vs rents constantly increasing.
| throw0101d wrote:
| > _I have a 30 year mortgage on my house with a 2.75% interest
| rate._
|
| The author on paying down his mortgage:
|
| > _It just increased our independence, even if it made no sense
| on paper. So that 's another element of debt that I think goes
| misunderstood. And a lot of that for both of those points is
| this idea that people don't make financial decisions on a
| spreadsheet. They don't make them in Excel. They make financial
| decisions at the dinner table. That's where they're talking
| about their goals and their own different personalities and
| their own unique fears and their own unique skills and whatnot.
| So that's why I kind of push people to say like, it's okay to
| make financial decisions that don't make any sense on paper if
| they work for you, if they check the boxes of your psychology
| and your goals that makes sense for you. And for me, extreme
| aversion, what looks like an irrational aversion today, and I
| would say is an irrational aversion to debt, is what works for
| me and what makes me happy, so that's why I've done it._
|
| * https://rationalreminder.ca/podcast/128
|
| * https://www.youtube.com/watch?v=NSaRb-iFwPA
| eadmund wrote:
| > outside of a potential rise of property taxes, my "rent"
| payment will not exceed a certain number of dollars
|
| And home insurance, too. But generally, yes: over the course of
| decades an American fixed-rate mortgage really is a wonderful
| thing.
|
| There _is_ also the possibility of deflation to worry about,
| although deflation comes with many other problems. I personally
| think that worrying about deflation is like worrying about a
| meteor, or the collapse of the local government: if it happens,
| so many other bad things will also happen that my mortgage will
| be the least of my concerns.
| fire_lake wrote:
| You probably paid more for the house due to the government
| intervention in the mortgage market, although that likely
| raised the rents similarly.
| recursivedoubts wrote:
| debt for housing, which is a depreciating asset in normal times
| (housing wears out, land may become more expensive) is not a
| great idea, but it has been normalized and when you have
| negative real rates & inflationary policies, as we had for over
| a decade, it can make a lot of sense
|
| debt for productive activity in general makes sense if it isn't
| compounding (mortgages act like simple interest, btw, although
| it's complicated since you pay more interest at the start of
| the loan and so if you move within the first five years you've
| paid almost entirely interest on the home)
|
| debt for consumption is always parasitic
|
| that's why it's insane how hard it is to get a business loan
| and how easy it is to get a credit card: usurers want suckers,
| not shared risk on productive investments
| anon7725 wrote:
| > debt for housing, which is a depreciating asset in normal
| times (housing wears out, land may become more expensive) is
| not a great idea, but it has been normalized and when you
| have negative real rates & inflationary policies, as we had
| for over a decade, it can make a lot of sense
|
| Has there been a 20 year stretch of time in the US in which
| housing is broadly a depreciating asset?
|
| Seems that land is definitely, and housing for the most part,
| an appreciating asset over time due to scarcity.
| aworks wrote:
| I'm not answering your direct question but for reasons, I'm
| interested in Indiana farm land in the 1920s and 1930s.
| From a peak in 1920, price per acre was down 2/3rds and
| didn't fully recover until 1948.
|
| The Great Depression started early for farmers...
|
| https://ag.purdue.edu/commercialag/home/resource/2023/08/th
| e...
| pixl97 wrote:
| Not sure if farmland to housing land is a 1:1 comparison
| in many places. Where you can dig well (and hopefully get
| safe water) and use septic it may be as you can get power
| almost anywhere, but some places require utilities which
| increases prices significantly
| recursivedoubts wrote:
| housing is, by definition, a depreciating asset: it wears
| out
|
| you are asking if real estate prices have fallen over a 20
| year period in the US and the answer is not in the modern
| inflationary era:
|
| https://fred.stlouisfed.org/series/QUSR628BIS
|
| but that mixes land & housing prices together of course
|
| prices have fallen over 10 year periods (sometimes
| dramatically) however, and the average length of ownership
| is 8 years, so timing can make a huge difference in
| outcomes of home ownership, particularly with the leverage
| involved.
| phaedrus wrote:
| Besides taxes, there is another sense in which outside
| circumstances can break your "rent control" model of home
| ownership with 30 year mortgage. Here in Oklahoma, insurance
| rates have skyrocketed in the last couple years. I now pay more
| in homeowner's insurance monthly than either my principle or
| interest payment (though perhaps not both together - yet). And
| I have a 4.something% mortgage.
|
| I suspect it has or will soon reach the point where the Kelly
| criterion says mathematically I'd be better off to self-insure
| - if I didn't have a bank loan.
|
| It's not just insurance (which is likely also weather-related);
| after a fluke super-cold Winter we had, our natural gas
| companies incurred a huge wholesale market bill which they've
| passed on to customers. I have a family member who owns his
| house free and clear whose gas bill went up so much he could no
| longer afford to heat his house. The gas company still tried /
| is trying to assess a one-time very large retroactive fixed fee
| even though he turned off his gas.
|
| My point, I guess, being even homeowners are not totally
| insulated from being screwed over by outside market forces.
| GenerocUsername wrote:
| You don't HAVE to carry home insurance do you? You can also
| change policies for different levels of insurance at any
| time. It's not exactly a debt, but an ongoing service
| dhosek wrote:
| If you have a mortgage, you are required to insure the
| building at the least.
| quadyeast wrote:
| Banks want to insure the collateral.
| HeyLaughingBoy wrote:
| To the point where if they're notified that your
| insurance has lapsed, they will warn you to get
| replacement coverage, or they will and then bill you for
| it.
|
| I had a not so fun experience with switching insurance
| providers at about the same time that my bank was about
| to make the insurance payment out of escrow.
| tombert wrote:
| That was something we had to worry about when buying our
| house.
|
| The house I have is pretty old and the roof had some
| issues. I obviously was planning on fixing those, but it
| became a bit of a catch-22 problem; the insurance I was
| planning on using (cuz I had a discount from my employer)
| said that they wouldn't insure me until the roof was
| thoroughly fixed and/or replaced, but I couldn't fix the
| roof until the deal closed, and the mortgage company
| wouldn't close the deal until we had insurance. We were
| afraid we'd have to pay the insane insurance rates from
| the mortgage company.
|
| Fortunately, after multiple days of shopping, I found one
| insurance company that agreed to insure me as long as I
| fixed the roof within 30 days of closing, which I did.
| vel0city wrote:
| I had a similar issue with buying a house. In the end we
| just wrote the roof replacement into the contingency of
| the contract and adjusted the price a bit so both sides
| paid a little bit into the cost of the new roof. The roof
| was replaced, we got our insurance, and the house was
| sold.
| tombert wrote:
| I am pretty sure that at least in NY you are required to
| have insurance if you have a mortgage.
|
| I guess once the mortgage is paid off for whatever reason
| you're welcome to not get insurance.
| nicbou wrote:
| In Berlin, only a small percentage of landlords beat
| inflation. It's a lot of work and a low return for an
| illiquid investment. Depending on the timing, many qualify
| housing as a lifestyle decision instead of an investment.
|
| Aside from what you've mentioned, the state can raise the
| efficiency standard to protect the environment, raise the
| cost of services, or make you pay to rebuild the street or
| sidewalk in front of your home. Then come the maintenance:
| new roof, new windows, new kitchen and so on.
|
| If your country has good tenant rights, there are not so many
| reasons to buy. It's better to invest the money for a while.
| Kirby64 wrote:
| Assuming it's market condition based and not specific to your
| house, rents would easily pass along insurance rate hikes to
| you as well. I don't see much difference in insulation from
| that for renting vs. buying.
| pixl97 wrote:
| >I suspect it has or will soon reach the point where the
| Kelly criterion says mathematically I'd be better off to
| self-insure
|
| Heh wait till you go to replace the property/damage. Unless
| you're doing yourself you'd absolutely crap on the floor once
| you see how high prices have got for this work.
|
| Add to this the increasing incidence of weather/climate
| related damages to homes and the situation isn't looking good
| for many states.
| oooyay wrote:
| > I have a 30 year mortgage on my house with a 2.75% interest
| rate. That has effectively given myself "rent control"
|
| This only works in places with fixed property tax. When I lived
| in Texas my property tax went up hand over fist every year as
| my property increased in value and automatic reassessments
| occurred. If your salary remains relatively stagnant and does
| not increase with cost of living (most salaries are subject to
| this) then you can certainly find yourself being subject to
| nuevo rent rates as a long time mortgage holder.
|
| I do agree with you that different types of debt should be
| classified differently.
| milkytron wrote:
| I've experienced this. My property taxes have gone up maybe
| 30% in the past few years. My income has increased pretty
| substantially, so it's not like I'm unable to pay for the
| increases. Compared to rent though, and having a mortgage
| where every month the amount of principle paid off increases,
| it still seems like the better option.
|
| Rent has increased 30-50% where I live over the same time
| period. At least when my property tax increases, it's because
| I have an asset that has increased in value. If I am at some
| point forced to sell because I can no longer afford the
| property taxes, then I'll walk away with more money than if I
| had been paying rent for those same years.
|
| Property taxes can force the same type of relocation that
| rent increases cause, but I think the typical outcome from
| someone being forced out by rising property taxes will be
| better than the person forced out by rising rents.
| tombert wrote:
| Fair enough, there's a maximum that they are allowed to raise
| property taxes in NYC (6% in a year, 20% over five years); my
| rates will eventually go up, but not super fast.
| oooyay wrote:
| Yeap! We're subject to a similar maximum in Portland. It
| was one of the aspects of government I specifically shopped
| for before we relocated. I did wish I'd looked more into
| the ever-expanding income tax we have at the city, county,
| and state levels but that's a different cost structure
| that's only significantly worse when factoring in Trump era
| tax reform.
| chinchilla2020 wrote:
| Covid is one example. The PPP loans provided by the federal
| government to businesses were forgiven. That sort of stimulus,
| combined with massive inflation, is favorable to a debtor, not
| a saver.
|
| For many, taking on debt in 2018 to buy a house for 200k would
| have paid off greatly by selling in 2022 for 500k. In an
| inflationary environment, you should grab as much cheap debt as
| possible.
| 2d8a875f-39a2-4 wrote:
| I'm not qualified to expound on it but the featured article
| doesn't cover opportunity cost, and a scale of risk appetites. To
| name just two concepts it's missing.
| phkahler wrote:
| >> the featured article doesn't cover opportunity cost, and a
| scale of risk appetites.
|
| If your business is moving along just fine and you have a
| decent cash reserve, what opportunity cost is all that
| important? FOMO doesn't seem like a good thing to let influence
| business decisions.
| Brajeshwar wrote:
| Today, I started picking up what I started some time back -- the
| book "Debt: The First 5,000 Years" by David Graeber goes deep
| into the details of Debt. I've heard good reviews and I hope this
| is a good book as they say.
|
| https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
| arj wrote:
| It is
| throw0101d wrote:
| > _the book "Debt: The First 5,000 Years" by David Graeber_
|
| Also would recommend _Money: The True Story of a Made-Up Thing_
| :
|
| > _Money only works because we all agree to believe in it. In
| Money, Jacob Goldstein shows how money is a useful fiction that
| has shaped societies for thousands of years, from the rise of
| coins in ancient Greece to the first stock market in Amsterdam
| to the emergence of shadow banking in the 21st century._
|
| > _At the heart of the story are the fringe thinkers and world
| leaders who reimagined money. Kublai Khan, the Mongol emperor,
| created paper money backed by nothing, centuries before it
| appeared in the west. John Law, a professional gambler and
| convicted murderer, brought modern money to France (and
| destroyed the country 's economy). The cypherpunks, a group of
| radical libertarian computer programmers, paved the way for
| bitcoin._
|
| * https://www.goodreads.com/en/book/show/50358103
|
| And _The power of gold : the history of an obsession_ (and
| Bernstein 's other books):
|
| > _Incorporating myth, history and contemporary investigation,
| Bernstein tells the story of how human beings have become
| intoxicated, obsessed, enriched, impoverished, humbled and
| proud for the sake of gold. From the past to the future,
| Bernstein 's portrayal of gold is intimately linked to the
| character of humankind._
|
| * https://www.goodreads.com/en/book/show/249245
| shoo wrote:
| Graeber's book is about how debts work in different societies
| and cultures and what they mean. i finished the book being more
| confused about debt and money than when i started. that said,
| it was an interesting read, i don't regret reading it.
|
| in contrast, this brief blog post by Morgan Housel gives a
| small visual metophor and a rule of thumb about how too much
| debt might be fatal when operating a business. arguably it
| teaches you something actionable, but doesn't tell you anything
| about your society.
|
| Graeber's book is not at all concerned with giving you
| actionable advice on how to best use (or avoid) debt to run a
| business within your society.
|
| that said, Graeber's book may give you some actionable advice
| on how to get along better with your neighbours, family and
| community. the tip would be: try to have everyone in the
| village owe each other debts. the idea is everyone should feel
| they have some obligation to others that they can never fully
| repay, but maybe they can return some other incomparable favour
| or assistance in future. this encourages cooperation.
|
| trying to fully repay or balance these debts would be frowned
| upon -- such behaviour is what one might do if one were seeking
| to not participate in society any more. not pro-social.
| cies wrote:
| RIP Graeber.
| lurking15 wrote:
| I feel like Graeber's book is another (left leaning) fad to
| glom on to, like Piketty's book some years back.
|
| I found this book, The Price of Time by Edward Chancellor [1],
| very useful for understanding the development of money and debt
| over history. It's so detailed and clearly extensively
| researched.
|
| [1]: https://www.harvard.com/book/the_price_of_time/
| imtringued wrote:
| In a general equilibrium economy with no innovation or all
| innovation potential being exhausted, money demand and
| interest disappear. "Interest" isn't the price of time, it is
| the price of liquidity.
|
| For some reason economists seem to gloss over that money
| doesn't abstract over just time. It abstracts over everything
| including location, trade partner, the specific commodity
| being traded and minimum quantities.
|
| Since people involuntarily produce liquidity by bringing
| their goods to the market, people owning the rights to that
| liquidity (aka capitalists) can "reap where they haven't
| sown".
|
| This leads to a paradoxical situation. Liquidity production
| is work like any other. In short, liquidity production
| demands to be compensated. Since the holders of liquidity can
| utilize the benefits of the liquidity services without paying
| they can either decide to use the liquidity benefits
| themselves or they can decide to monetize them by selling
| liquidity on the capital markets. The compensation for this
| liquidity service is known as risk free interest.
|
| As I mentioned, liquidity demands to be compensated, but
| since the producer of liquidity does not get paid, they will
| eventually wisen up and cease producing liquidity in the
| national transaction network. This leads to production
| capacity in the economy being dismantled since it represents
| a commitment in time-commodity-quantity-person-space.
| Instead, future producers of liquidity await the holders of
| liquidity to effectively signal their demand so that they
| know to what production process they should commit to.
|
| Since information acquisition is costly, it is perceived to
| be cheaper to avoid committing oneself or in more direct
| terms: interest measures the reluctance to lose control over
| ones capital.
| venv wrote:
| Piketty's book (Capital in the Twenty-First Century) is most
| definitely not a fad. It is a result of serious research into
| historical economic data and anyone intellectually honest
| ought take it seriously. As anything in the social science of
| economics, it is subject to debate, but to call it a 'fad' is
| odd, to put it mildly.
| NegativeK wrote:
| I think it's popularity among layfolk, like myself, was a
| fad. I'd be incredibly surprised if it's flying off the
| shelves now like it was right after release.
|
| But popularity doesn't validate or invalidate its content.
| mempko wrote:
| It's strange that you would trust a fund manager like Edward
| Chancellor over a trained anthropologist like Graeber on
| historical research. The price of time looks a at a small
| sliver of debt through the eye of interest rates and their
| impacts.
|
| Chancellor's axe to grind is clear, that manipulation of
| interest rates by central governments has led to economic
| instability. Yet historically emperors, kings, and other
| rulers would periodically wipe the slate clear because debt
| enslaved too many people causing instability.
|
| Read Graeber's book. It's better researched.
| lurking15 wrote:
| > Chancellor's axe to grind is clear, that manipulation of
| interest rates by central governments has led to economic
| instability
|
| Have you read the book? Cause this is such a simplistic
| reduction of the book, I can't help to think that YOU have
| an axe to grind.
| Nicholas_C wrote:
| Thanks for the rec. I've wanted to read "Debt" for a long
| time but I recently read Graeber's book "the Dawn of
| Everything" and it bent the truth so much every which way to
| get to his POV that I won't read another book by him.
| mempko wrote:
| This is a life changing book. It demystifies the biggest part
| of our lives, which is money (and debt) and helps you
| contextualize your world by looking into the past. It's the
| best researched book on the subject.
| Workaccount2 wrote:
| Reminds me of those real estate influencer types you see on
| social media...
|
| "We are $4.25 million in debt but live care free vacation filled
| lives bringing in $40,000 a month"
| eadmund wrote:
| $40,000 is $480,000/year, which is 11.3% of $4.25 million; if
| one borrowed that $4.25 million at a significant discount to
| 11.3% then that might be a very good financial decision indeed.
|
| If it's at a floating rate, it might still be a good decision.
| But right now some business loans are up around 15%, at which
| point the situation above would be an absolute catastrophe.
| DrPhish wrote:
| "Debt is slavery" is how I've always thought about debt, and what
| I've taught my kids.
| Night_Thastus wrote:
| For low-income people, debt is slavery.
|
| For high-income people, debt is a powerful tool.
|
| The vast majority of people fall into group #1 and need to
| treat debts like credit cards and car payments with _extreme_
| caution.
| psychlops wrote:
| > For high-income people, debt is a powerful tool.
|
| How?
| ihumanable wrote:
| Not the original poster, but debt can allow you to shift
| transactions to periods that are most advantageous to you.
|
| Here's an example. Let's say that you as a high wealth
| individual have some stock. The stock has a value of $10M
| but you can only realize that value through the sale of the
| stock.
|
| If you sell the stock right now you have to sell it for the
| price the market will buy it at and you have to pay taxes
| on the profit, either income taxes if you've not had the
| stock for long or capital gains taxes if you've held it for
| the requisite period.
|
| It is in your interest to optimize your sale so that you
| pay the least amount in taxes and get the best price per
| share. You'd love to be able to hold your stock until you
| can do that, but you need money now. In comes debt.
|
| Someone will probably happily issue you some debt that you
| can use today as money. You can collateralize that debt
| with your $10M in paper value and get a nice interest rate.
|
| So you take out $1M in debt and enjoy life and at the end
| you have to pay back, to keep the math easy, $1.1M. This
| debt cost you $100k but if by taking on that debt you can
| sell when the stock price is higher or convert income tax
| (37%) into capital gains (20%) then the $100k could easily
| buy you much more than $100k.
|
| In our example if the stock price were the same but all you
| did was hold the asset long enough to convert it from short
| term to long term then instead of paying $10M * 37% = $3.7M
| in taxes, you'd pay $10M * 20% = $2M in taxes. That's a
| savings of $1.7M on your tax bill.
|
| This is how people with assets can use debt as a tool.
| abduhl wrote:
| The most important things financially are cash flow and
| coffer size. Being able to take on debt at advantageous
| times provides both of these things because it allows you
| to shift cash flow temporally and increase the money you
| have on hand at will. A rich person can translate portions
| of their future earnings into large amounts of capital on
| command, and this can come in the form of future
| anticipated earnings too (e.g., future anticipated rents or
| sales) while still being able to live on a day-to-day
| basis. Being able to control your current and future
| finances can also provide tax benefits if structured
| correctly.
|
| Poor people can't do that - they need all of their cash now
| just to live, all the time.
| hipratham wrote:
| https://v.redd.it/s0qwj8td9tyc1
| nickjj wrote:
| > How?
|
| Here's an example that could be achievable without needing
| to be a super high wealth individual, but does require
| being able to pay a few thousand dollars up front with
| little notice.
|
| Let's say you get hit with a $3,500 medical bill. The
| hospital says they're willing to reduce it by 20% ($700) if
| you pay up front so now your bill is $2,800.
|
| Now, let's say you rarely use credit cards and a major bank
| will give you $750 cash as a bonus if you spend $4,000 in 3
| months. With the medical bill and regular spending you can
| hit that without making any "extra" purchases.
|
| You could sign up for that card, immediately pay off the
| $2,800 to avoid paying any interest on the card and once
| you get the cashback bonus it's really like paying $2,050
| instead of $3,500. Now you can take that $1,500 you saved,
| invest it at 5% for 15 years and with compounding interest
| you get back +$1,500 profit (minus taxes) which essentially
| means your medical bill was $500.
|
| Of course this requires luck and timing around being able
| to do that with the card but even if you didn't have the
| card bonus you can get a guaranteed 20% return in 1 year by
| paying it off. The alternative is paying the full amount in
| smaller payments. Technically a lot of hospitals don't
| charge interest and give you reasonable plans to pay it off
| but most other places will charge you interest.
| gr8r wrote:
| you are my group hahaha.
|
| jokes apart, some great replies explain how.
| rcxdude wrote:
| I would phrase it more as a powerful tool if you are
| financially literate and have a predictable income
| (especially if it's predictable with confidence to a
| lender), something which is generally more true of high-
| income people. Debt (when appropriately priced) allows you
| access things that you would otherwise need to wait to
| afford, allowing saving money vs. renting said thing, or
| the time-value to you of the length of that wait (whether
| it's through directly financially benefitting from that
| thing, or from simply whatever utility you are getting from
| that thing, or both, like buying a more expensive car which
| saves you money on fuel and maintenance as well as just
| being nicer to drive). It's dangerous when your income is
| not predictable (because it means that debt is more
| expensive for you as well as more personal risk), or if you
| are forced into debt for necessities that are beyond your
| means, or if you are financially illiterate, all of which
| can mean you take on debt beyond your means, which quickly
| becomes exploitative.
|
| (That latter part can happen even with very high incomes.
| It's not unheard of for e.g. professional sports players or
| celebrity actors making millions to take on way too much
| debt and ruin themselves, especially because their high
| income can disappear quickly, e.g. due to an injury)
| Tokkemon wrote:
| Debt also allows you to live when you can't find means
| otherwise.
| AndrewKemendo wrote:
| This guy's entire life (He's a VC) is about pushing debt in the
| form of promissory notes and equity-debt onto companies in
| exchange for his own ownership
|
| How does he reconcile the fact that the companies he lauds in the
| beginning, would completely shun any business with him (an
| investor) for precisely the reasons described?
|
| I feel like investors and VC are unaware of their own values
| throw0101d wrote:
| > _This guy 's entire life (He's a VC) is about pushing debt in
| the form of promissory notes and equity-debt onto companies in
| exchange for his own ownership_
|
| There's a difference between business finance and personal
| finance. There's a difference between what needs to be done to
| start a business and what needs to be done to keep it going.
|
| Apple started in a garage, but it is no longer run out of one.
| Apple started with loans and investors, Apple now has a large
| pile of cash (though also bonds that it needs to pay).
| yellow_lead wrote:
| Well, the article specifically references Japanese
| _businesses_
| throw0101d wrote:
| In the introduction. He then has paragraphs such as:
|
| > _Let's say this represents volatility over your life. Not
| just market volatility, but life world and life volatility:
| recessions, wars, divorces, illness, moves, floods, changes
| of heart, etc._
|
| And further down:
|
| > _I hope to be around for another 50 years. What are the
| odds that during those 50 years I will experience one or
| more of the following: Wars, recessions, terrorist attacks,
| pandemics, bad political decisions, family emergencies,
| unforeseen health crises, career transitions, wayward
| children, and other mishaps?_
|
| Not sure how many _businesses_ experience divorce, family
| emergencies, career transitions, wayward children.
| stevenally wrote:
| I guess there's personal debt and there's company debt. There's
| a big difference.
| morgante wrote:
| What exactly is "equity-debt?" That is never a term I have
| heard of before.
| rKarpinski wrote:
| Interesting they chose to use this example of Japanese companies
| not having debt, when the country of Japan has the highest debt
| to GDP of any developed nation[1] which has contributed to its
| economic stagnation since the 1990s
|
| [1] https://en.wikipedia.org/wiki/National_debt_of_Japan
| gr8r wrote:
| Interesting. Just another reason I'm convinced some of these
| recent non-fiction is just commentary (almost) making-
| up/inflating a problem and then providing a "magic" solution.
| The content isn't nearly as timeless nor broadly true.
| rKarpinski wrote:
| yeah, it's content marketing which is all the rage these
| days. The purpose of pieces like this is to advertise (the VC
| fund) not to provide deep insight
| throw0101d wrote:
| The author of the article, Morgan Housel, is also the author of
| the book _The Psychology of Money_. This thoughts on, e.g.,
| paying down his mortgage:
|
| > _It just increased our independence, even if it made no sense
| on paper. So that 's another element of debt that I think goes
| misunderstood. And a lot of that for both of those points is this
| idea that people don't make financial decisions on a spreadsheet.
| They don't make them in Excel. They make financial decisions at
| the dinner table. That's where they're talking about their goals
| and their own different personalities and their own unique fears
| and their own unique skills and whatnot. So that's why I kind of
| push people to say like, it's okay to make financial decisions
| that don't make any sense on paper if they work for you, if they
| check the boxes of your psychology and your goals that makes
| sense for you. And for me, extreme aversion, what looks like an
| irrational aversion today, and I would say is an irrational
| aversion to debt, is what works for me and what makes me happy,
| so that's why I've done it._
|
| * https://rationalreminder.ca/podcast/128
|
| * https://www.youtube.com/watch?v=NSaRb-iFwPA
| eadmund wrote:
| > > it's okay to make financial decisions that don't make any
| sense on paper if they work for you
|
| I consider that to be (mostly) pernicious nonsense, like 'it's
| okay to walk off of a cliff, if that works for you.' To a very
| great degree, finances are a mathematical/legal reality: the
| path of wisdom is to adjust one's emotions to that reality
| rather than to imagine that reality matches one's emotions.
|
| There is _some_ degree of truth to it, of course: at the end of
| the day, life is not about maximising one's finances, and one's
| emotions definitely have a role to play in one's happiness. But
| the sooner one learns to defer immediate gratification, save
| for the future and build up a nest egg, the happier one is
| likely to be.
| DiggyJohnson wrote:
| Walking off a cliff doesn't work for anyone, that's why
| you're missing the point. The "some" degree of truth to it is
| the entire point. Nobody is suggesting to "do whatever feels
| right or good when it comes to financial decisions."
| jonfw wrote:
| I know someone who recently retired, sold his expensive home,
| and bought a new home in a cheaper area outright with cash.
|
| He had a fixed income that would easily cover his living
| expenses. He had an investment portfolio that he is planning
| to pass on to his family.
|
| By investing his cash and getting a mortgage on his home- he
| certainly would have made enough money to cover his mortgage
| on interest. But, he'd be at risk of going cash flow
| negative, and having to liquidate some of his investments to
| cover his mortgage + lifestyle.
|
| He knew that having to liquidate investments would bother
| him- it'd be a lot harder to justify that vacation if he'd
| have to sell some stocks. Those stocks are for his family in
| his mind.
|
| By buying that home outright, he now knows that he's going to
| be cash flow positive for as long as he's alive. He'll never
| have to dip into his stocks. And he'll never have to stretch
| a dollar.
|
| It's not a strategy that you'd come up with on a spreadsheet,
| but he's one of the happiest guys I know
| ZephyrBlu wrote:
| A financial strategy is worthless if you don't follow it. If
| the most optimal strategy isn't going to work for your
| situation for one reason or another, there is no point in
| trying to force it. Picking a sub-optimal approach that is
| sustainable makes more sense.
| ochoseis wrote:
| Rational Reminder is one of the _best_ podcasts I listen to
| right now. Love the polite Canadian vibe
| EFreethought wrote:
| I watched some of the videos on their YouTube playlist about
| blockchain and crypto, and while there was some good
| information, there was not a lot of interaction. The hosts
| just seemed to read from a list of questions, and they did
| not seem to have any follow-up questions.
| more_corn wrote:
| The core (flawed) assumption is that a thousand year business is
| desirable. As a business owner and a worker I don't want to work
| in my great, great grand pappy's toothpick company.
|
| I want to have opportunities to create my own business, make
| profit, enjoy profit, hand modest generational wealth to my
| descendants and die without regrets.
|
| Thousand year business are not the way to achieve my goals and my
| goals are not incomplete with debt.
|
| I hold debt on my house. My future is tied to that debt and I
| wouldn't have it another way (I mean unless you want to pay off
| my house).
| CaptainZapp wrote:
| Maybe Japan and the Japanese have some different values than
| our fast charging Western world?
|
| Let me introduce the Shokunin (translated as Artisan, when you
| look it up on Wikipedia, which isn't quite right).
|
| What a Shokunin produces is, sort of, the antithesis of what
| you can order from Temu.
|
| A rather interesting blog post[0] explaining the concept:
|
| "Shokunin is more than just a craftsperson or artisan. It
| represents the devotion and lifelong commitment of craftsmen
| who dedicate themselves to perfecting their art. They embody
| the values of dedication to craft, excellence in craftsmanship,
| and masterful work. Shokunin believe in meticulous attention to
| detail and uphold the highest standards of quality and skill in
| their work."
|
| For us Westerners it's not fathomable to work 20 years, or a
| lifetime, ro achieve a _perfect_ product. Who 's to say that
| this concept is wrong?
|
| And I think it has a lot to do with a society who believes that
| a 1000 year old company is not only desirable but a virtue.
|
| [0] https://tobyleon.com/blogs/art-design/shokunin-japan-
| artisan...
| mouzogu wrote:
| > "As debt increases, you narrow the range of outcomes you can
| endure in life."
|
| when you have cash you do what you want. when you have debt you
| do what someone else wants.
| Tokkemon wrote:
| Real hard-hitting, groundbreaking news on HN.
| adverbly wrote:
| This is an overly simplistic model which happens to have applied
| very well to Japan but would break down if applied in other
| economies where inflationary risk is present.
|
| I'm pretty sure there's a joke about there being three types of
| economies: developed, undeveloped, and Japan.
|
| Cash is useless if the value of the cash goes down by 10,000% and
| you don't have an inflation adjusted revenue stream. You have to
| do something with the cash to get enough interest to keep up with
| inflation.
| k__ wrote:
| What about deflationary currencies?
| adverbly wrote:
| I don't think there have been any currencies that have been
| deflationary for 100+ years so it's impossible to say.
| Obviously currency risk is what you have to watch out for
| though if you're not able to consistently both spend and
| collect from this single currency over the lifetime of your
| business.
| psychlops wrote:
| Bitcoin is a deflationary currency.
| callalex wrote:
| It's a security/commodity, not a currency.
| psychlops wrote:
| It's a currency and used as a direct form of acceptable
| payment. Not as much as it's creator envisioned, but it
| is. It's not a security. It certainly shares attributes
| with a commodity although I think a characteristic of a
| commodity is that it is tangible.
| bigstrat2003 wrote:
| That's nonsense. Bitcoin is absolutely a currency.
| drexlspivey wrote:
| What is that?
| bluGill wrote:
| There are more assets than cash. cash is the most accesible,
| but others exist and are useful to have.
| gbalduzzi wrote:
| I don't read OP article as "keep all your worth in cash".
|
| Asset allocation is of course extremely important, but the main
| point made in the article is not having debt
| anonporridge wrote:
| My bet is most of these long lived businesses also maintain a
| large pile of gold, which is a fantastic multi generational
| store of value.
|
| But yeah, cash is really just a call on the local monopoly on
| violence, which changes all the time over the long arc of
| history. Terrible long term store of value.
| Joel_Mckay wrote:
| Debt is essentially sacrificing future well-being for immediate
| access to some product or service utility normally inaccessible
| from current market conditions.
|
| Even if a specific type of debt load is not necessarily a
| liability for personal profit, it is assuredly someones problem
| eventually...
|
| The theory debt doesn't matter only applies to 0.04% of the
| population dodging tax burdens with structured financial
| instruments. The interest rates should be set over 14.2% (and we
| know it), as aristocratic gambling-culture has stolen living-
| standard value from great-great-grandchildren not even born yet.
|
| The poignant question is 'could anyone do anything about the
| trends', and the short answer is a simple 'No'.
|
| https://en.wikipedia.org/wiki/Tragedy_of_the_commons
|
| Have a great day, =3
| cess11 wrote:
| Might want to read this monograph from 1990:
| https://www.cambridge.org/core/books/governing-the-commons/A...
| Joel_Mckay wrote:
| Another counterargument: is the opportunity for individuals
| to improve family living standards increasing or decreasing
| since the 1950's?
|
| I'll spare you the exhaustive list from education, housing,
| infrastructure, and medical service access. It is not, kids
| are no longer getting stable jobs, their own homes, or
| starting families until later in life.
|
| In my opinion, creating financial securities out of
| communities just turned most cities into theme-park
| economies. Fun, but innately unsustainable for all visitors
| except the board.
|
| Personally, I have found the contradictions formed between
| macroeconomics and microeconomics fascinating. Primarily
| because tragedy can be profitable in a global context, but
| destructive from a personal perspective.
|
| "Do you want to be right or do you want to be happy?"
| (Phillip C. McGraw)
| cess11 wrote:
| You haven't changed my mind, I still think you ought to
| read Ostrom.
|
| "Mankind does not strive for happiness; only the Englishman
| does". (Friedrich Nietzsche)
| Joel_Mckay wrote:
| Nietzsche spent most of his time in a brothel, and is
| hardly an authority on moral intellectualism.
|
| I actually really respect you have a differing opinion,
| as most of my data driven conclusions are statistical
| rather than philosophical in nature.
|
| Have a wonderful day, and good luck out there =3
| cess11 wrote:
| Kinda weird to make stuff up like that. Maybe you're
| confusing him with Toulouse-Lautrec, known for moral
| strength rather than moral intellect?
|
| Nietzsche's The Geneaology of Morals is arguably the most
| important treatise on christian morality in the previous
| century, possibly that millenium.
| Joel_Mckay wrote:
| Nietzsche was a smart man that had a difficult personal
| story, and it is interesting to learn about his life. He
| was suspected of suffering neurological issues from
| syphilis... obviously not a particularly amusing subject
| before the invention of antibiotics.
|
| I never make stuff up unless it is obviously funny or
| someone makes me a liar... my neutral evil temperament
| usually ensures stoic honesty even when being deceived.
| Some of my most cherished friends don't agree with me
| about most things =3
| nineplay wrote:
| You can take money and pay off your mortgage or you can take that
| same money, throw it in a low cost index fund, and keep the
| mortgage. Most people are going to end up better off with the
| later. Cash has the illusion of being safer but start talking
| about inflation and it starts to lose its luster.
| gbalduzzi wrote:
| Sure, and what happens when, after you do that, some calamity
| happens and stocks go down by more than 50%, you lose your job
| and you can't pay the mortgage anymore?
|
| That is of course extreme, but proves the article point: by not
| having debt, you can sustain a much broaden series of events.
|
| As everything in life, it's a spectrum. I think it's pretty
| reasonable to accept the "sustainability narrowing" that comes
| from an affordable mortgage, but I avoid taking debt for other
| goods that are less important and would limit my ability to
| withstand unexpected events and accidents
| avgDev wrote:
| You can easily plan for such events.
|
| What if your house collapses due to some event that is not
| covered by your insurance and you used all the capital to
| purchase it? This is as an extreme example as the market
| dropping 50%.
|
| Surviving market crashes is not rocket science, don't be 100%
| in stocks. Have a decent emergency fund if you have a family,
| have some bonds, have a house with decent equity, and don't
| subscribe to consumerism.
| kgwgk wrote:
| > What if your house collapses due to some event that is
| not covered by your insurance and you used all the capital
| to purchase it? This is as an extreme example as the market
| dropping 50%.
|
| Quite a lot of people have experienced a market dropping
| 50% - not so many have seen their house collapse due to
| some event not covered by their insurance.
| avgDev wrote:
| At least the stock market has bounced back, can't say the
| same about that house.
| TexanFeller wrote:
| > what happens when, after you do that, some calamity happens
| and stocks go down by more than 50%, you lose your job and
| you can't pay the mortgage anymore?
|
| > That is of course extreme
|
| I don't think that's even that extreme. In 2020 the market
| crashed something like 40% and at the same time vast swaths
| of the population became unemployed. All of my grandparents
| experienced the great depression. We will be very fortunate
| if we aren't heavily hit by war or economic disasters for the
| rest of our life.
| incomingpain wrote:
| I love this article. Very well laid out and simply explained.
| This article is explaining the set in stone mental health
| association with debt servicing.
|
| >I'm not an anti-debt zealot. There's a time and place, and used
| responsibly it's a wonderful tool.
|
| I am, here's how I would add to this article.
|
| How do you tell how in debt you are. How tight is the graph? Its
| not just your debt.
|
| Your paycheque comes from your neighbour's spending. If they are
| in debt, then you too will feel their collective debt. Generally
| speaking debt is mortgages> cars> tuition. Not a great deal else.
|
| So you can actually look at the public data.
|
| Norway is 210% debt to income.
|
| Canada is 178% debt to income.
|
| The threshold of 100% is a big deal. It's when discretionary
| spending stops. At 100%, your income goes 100% toward servicing
| debt. It's generally regarded that you keep this in the 30-40%
| range.
|
| When these thresholds hit ~130% that's typical of a financial
| crisis. To reach 178% or above 200%... that's only possible if
| actions are being taken by the central banks to prevent a crash
| temporarily.
|
| Checking Norway, because I don't know the state of their central
| bank. It seems Norway went bankrupt in the early 2000s? It has
| been a steady crash since being prevented by their central bank?
|
| Private Debt to GDP in Norway increased to 277.90 percent in 2023
|
| So here's the thing about central banks working to prevent
| crashes. You can do so of course, but you also need to deflate
| the risk. But all they are doing is inflating the inevitable pop.
| You're just making the crash worse over time.
| sokoloff wrote:
| > Norway is 210% debt to income.
|
| > Canada is 178% debt to income.
|
| > The threshold of 100% is a big deal. It's when discretionary
| spending stops. At 100%, your income goes 100% toward servicing
| debt.
|
| You're confusing two different measures there. The first two
| are "total debt" (a stock) vs "total income" (a flow). Then, in
| the last paragraph, you switch to talking about consumption
| declines as if the total debt _stock_ was directly comparable
| to a total income _flow_ , which it obviously isn't.
|
| The total interest due on the debt is the flow that you should
| be comparing to the total income flow. (Otherwise, if spending
| stopped at 100% debt-to-income, how could Canada and Norway's
| economy be working at 1.8 and 2.1 times that trigger
| threshold?)
|
| My mortgage debt (the stock) is give-or-take 100% of our annual
| household income (the flow).
|
| We have plenty of money left over each month to buy things,
| because the _payments on that mortgage_ (the flow) are a
| sensible fraction of our household income (the flow).
| incomingpain wrote:
| >The total interest due on the debt is the flow that you
| should be comparing to the total income flow.
|
| That's what these numbers are.
|
| I'm talking about a calculated popular metric many people use
| for many countries all over the world.
|
| It's really not a controversial or debated subject for either
| of these countries.
| sokoloff wrote:
| You're incorrect about what that figure _is_.
|
| https://tradingeconomics.com/norway/households-debt-to-
| incom...
|
| That means for every 100 units of annual income, Norwegians
| owe 210 units in total debt. (Not total debt service
| payments [a flow, with unit of kr/yr], but total debt [a
| stock, with unit of kr].)
| ChrisMarshallNY wrote:
| _> they tend to share a common characteristic: they hold tons of
| cash, and no debt._
|
| That describes the old-fashioned company that I worked for. They
| are only a bit over 100 years old, but they are _cheap_ bastards.
| I learned how to work quite frugally, under them.
| WalterBright wrote:
| Debt is a tool:
|
| 1. Use it to account for the mismatch between income and
| expenses.
|
| 2. It takes money to start a business. You can borrow and start
| the business now, or save up for N years and then start. Same
| thing for buying a house.
|
| 3. If you can borrow money at 5%, and invest it at 10%, you make
| money.
|
| Using debt to buy frills, though, is not a great idea.
|
| I also use margin debt to increase my stock purchases. The
| returns are larger, but I must also endure wilder swings in the
| value. Some people say "what if the stock market goes to zero,
| what then, huh?" My reply is if the stock market goes to zero,
| everything else has gone to hell including whatever other
| investments you have.
| mempko wrote:
| Here is a mind bending concept. Those that hold a lot of cash are
| resilient. But that cash came from someone else getting into
| debt. That's because money IS debt. Money gets created when
| people take out loans. That debt ends up as income to someone
| else.
|
| If you hold a lot of savings, others had to get into debt to
| create the money that ended up in your bank account.
|
| If EVERYONE decides to hoard cash, then the economy goes into a
| deflationary spiral and everyone's ability to save goes to zero.
| This is called the Paradox of Thrift.
|
| Many folks on HN have huge savings accounts. Thank those that
| went into debt so you can have savings. They sacrificed their
| resilience for you to have yours.
| mucle6 wrote:
| Not trying to be pedantic, just curious.
|
| Money isn't zero sum right? Like the U.S. Government prints it
| and spends it, so its not clear to me that there is a balance
| sheet of cash being someone elses debt. Unless its in a
| metaphorical sense like we're all in "debt" to the U.S
| government and we pay interest when they inflate more money.
| z0r wrote:
| Money isn't zero sum, but its value is based on being able to
| exchange it for goods and services - or to compel the
| production of goods and the carrying out of services. The
| less debt exists, the less compelled people are to work.
| nr378 wrote:
| > Like the U.S. Government prints it and spends it, so its
| not clear to me that there is a balance sheet of cash being
| someone elses debt.
|
| The US government prints it ("quantitative easing") by
| creating new money and buying its own debt. In this sense
| it's still correct to say this Government printed money is
| backed by debt.
|
| Nb. That this is only a small proportion of the overall money
| supply though. Commercial bank deposits (created through bank
| lending) represent the vast majority.
| mempko wrote:
| The government creates money by spending, but most money is
| actually created by commercial banks when people take out
| loans. ALL money is accounted for in these ledgers. So
| consequently, most money in people's deposit accounts is
| debt, either their own or someone else's.
|
| I recommend reading the Bank of England's Money Creation in
| the Modern Economy
|
| https://www.bankofengland.co.uk/quarterly-
| bulletin/2014/q1/m...
| rcxdude wrote:
| Pretty much all of the value of basically every savings account
| is primarily debt from organisations, not personal debt.
| curious_cat_163 wrote:
| I think that the analogy of drawing lines on a volatile plot is a
| good starting point. But fails to account for some dynamics of
| how the consequences of debt can be different.
|
| Debt limits choices. But, one can still make a choice that
| expands their liberty.
|
| Having a stable home, being able to go to college, etc. are good
| uses of debt.
|
| Buying a flashy car purely to impress the neighbors? Maybe not.
| TexanFeller wrote:
| I have a paid off house and zero debt. Sure I might be ahead if I
| had used some of the cash to buy stocks instead of paying down
| the house early, but I'm completely happy with my decision. There
| is no peace of mind like not owing anyone a cent and keeping your
| living expenses low. Having debt was incredibly stressful and no
| longer worrying about making payments is the best thing that's
| ever happened to my mental health.
| dheera wrote:
| I never understood buying things that I can't afford. I always
| thought you earn money and when you earn enough money to buy
| something you can buy that something. That is always how I have
| lived life.
|
| For that reason I also find it ridiculous that it's the social
| norm to take debt to buy a roof to put over your head. A
| (simple, clean, functional) house is a basic need, not a luxury
| item. I always assumed that if I don't have the cash for a
| house, I can't afford a house. In those terms, I can't afford a
| house right now, so I've been renting the whole time.
|
| I think it _should_ be the social norm for the median income to
| be able to buy a house with cash. For that to happen either
| people need to be making $1M /year median, or house prices need
| to come down to 1/5 of what they are.
| sokoloff wrote:
| It's fine to expect some people to buy a house with cash. I
| don't think that precludes saving for many years to do so
| (meaning the median income doesn't need to be $1M/yr).
| dheera wrote:
| Unfortunately housing prices are rising so fast that saving
| for years doesn't necessarily get you there, unless median
| income is close to ~1M by my back-of-envelope calculations,
| which include:
|
| - taxes (1M is close to 500K after taxes)
|
| - money that you need to cut out and put into retirement to
| sustain yourself from age 65-100
|
| - living expenses and rent until you buy
|
| - real estate prices rising the whole time
| sokoloff wrote:
| > living expenses and rent until you buy
|
| Which will of course be stratospheric in a world where
| median labor costs $500 per hour.
| rcxdude wrote:
| It's more typical to think of 'affording' in terms of your
| expected lifetime income, and this is generally a good
| predictor of people's spending habits. Lending generally
| enables this. Avoiding debt entirely is a very risk-averse
| strategy. As ridiculous as house prices are, they are still
| generally affordable for many (and whether renting or buying
| is a better overall financial decision is dependent on many
| factors which depend on your location, how long you expect to
| own the house, and your risk profile for real estate vs any
| other kind of investment. Factors like rental rights can also
| factor pretty heavily).
| dheera wrote:
| Why is avoiding debt a risk averse strategy?
|
| I actually do a lot of high risk investments with a small
| percentage of my net worth -- bitcoin, options, you name
| it. But I do it with hard cash to my name. If I lose a
| chunk of that I don't owe anyone anything.
|
| I just never thought spending someone else's money and then
| owing them was even anywhere close to my moral radar of
| things I would do.
|
| The only one time I took a debt is for a car when I _had_
| the cash to buy it but it was 2022 and I took a loan at 2%
| and put the balance of the car in treasury and municipal
| bonds at ~5% and paying back the loan slowly while selling
| off the bonds. I wouldn 't take a loan if I didn't have the
| money. Before I could afford a car I just rented cars.
| rcxdude wrote:
| because the risk with debt is not being able to pay it
| back - and you are paying the lender for their side of
| that risk (generally paying less the more of that risk
| falls on your side, like secured debt). It's a service
| they are freely offering (and in fact benefits them
| disproportionately on average), I don't see how it's a
| moral issue at all.
| dheera wrote:
| The moral issue I have is that simply put, if I don't
| have the money for something, I wasn't meant to have that
| something. I need to earn the money for it, after which I
| deserve to have that something.
|
| However, the most basic clean-and-functional versions of
| basic necessities (food, water, shelter, and
| transportation) should be accessible to everyone working
| a full-time job, in my opinion, without having to spend
| other peoples' money.
|
| 3 out of those 4 are attainable even with a low-paying
| job, it's really just shelter that is the problem.
| rcxdude wrote:
| Do you believe that taking investment is immoral as well,
| then? That access to resources should be entirely based
| on past work/achievements, with no judgement applied to
| anything to be done in the future? That does seem to be
| the standard you are applying to yourself, at least.
|
| (And again, I do agree that housing is incredibly
| overpriced in much of the world, it's just that debt vs
| not doesn't have much to do with it. The high price of
| mortgages is the same reason the rent is high, and the
| rent being too high is a problem even if it doesn't
| involve debt)
| JadeNB wrote:
| > The moral issue I have is that simply put, if I don't
| have the money for something, I wasn't meant to have that
| something. I need to earn the money for it, after which I
| deserve to have that something.
|
| There's a difference between _having_ money and _earning_
| money. If you find $20, are you therefore $20 more
| deserving? If you are mugged and the thief gets $100,
| does that make you $100 less deserving?
|
| There are plenty of people who have lots of money through
| no good deed, and plenty who have little through no evil
| deed, and I think confusing monetary holdings with
| morality is a very poor road to go down.
| LouisSayers wrote:
| > Why is avoiding debt a risk averse strategy?
|
| Note that they said avoiding ALL debt.
|
| For example, my student loan collects interest at a rate
| of 2.9%. Therefore, it makes sense to maintain that debt
| if I believe (and accept the risk) of making an
| investment that pays back a rate of 10%.
|
| Financially it might make sense to keep that debt, pay
| the minimum and invest cash into let's say an index fund.
|
| If you have a hardline stance that you NEVER want any
| debt, then you are basically saying you're highly risk
| averse (at least when it comes to ending up in the
| negative).
| wyre wrote:
| >As ridiculous as house prices are, they are still
| generally affordable for many
|
| What? Technically this is true because "many" people
| already own homes and can use that wealth towards another.
| However, when talking about the unafordability of homes the
| target market being discussed should be first-time home
| buyers (unless you have an investment podcast or
| something).
|
| In my HCoL bubble the only people I know that can afford
| their first house are high-income DINKs, or living 30mins
| outside of the city, or have a high-paying remote job and
| can relocate to a LCoL area with its own drawbacks.
| booleandilemma wrote:
| I'm in the same spot. I'm in the middle class, I've been
| renting for years, and I refuse to go into debt by taking out
| a loan for a house. This is a societal failure.
| Dylan16807 wrote:
| I agree that house prices should come down.
|
| But given that you need a home, what's the difference between
| $1000 in rent+fees and $1000 in mortgage+taxes+fees?
|
| Normally the biggest difference between renting and buying
| with debt is that you can stop renting. But you're not going
| to stop having a home.
| synergy20 wrote:
| my landlord friend told me, many of her tenants earn decent
| salary, definitely more than her income, they can even
| spend $8000 or more to remodel a car or things like that,
| but can never save up to the 20% down payment ever.
| bmicraft wrote:
| > spend $8000 or more to remodel a car
|
| > can never save up to the 20% down payment
|
| something tells me those two things are connected
| jjcm wrote:
| > I never understood buying things that I can't afford.
|
| I think even if you choose not to use debt as a mechanism,
| you should understand why it's used as a mechanism, much like
| the parent comment has. Debt as a mechanism is not a bad
| thing - there's ample proof out there that availability of
| credit is an extremely strong indicator of future economic
| activity at the macro level.
| beryilma wrote:
| Owning a house does not mean not owing anyone a cent. You still
| owe multiple types of taxes to the government. You still need
| to get insurance. You still need to make repairs.
|
| I actually find piece of mind in renting. I can always say
| screw it and move to the cheapest part of the country as I am
| getting closer to retirement age.
| m463 wrote:
| I like this article.
|
| I also like the book "Debt" by Graeber. Different, but very eye
| opening.
| mayiintroduce wrote:
| necessary debt has value unnecessary debt costs value
| personjerry wrote:
| That's a really naive view. If you take on debt for a good
| reason, you can alter the trajectory of the function completely.
| hinkley wrote:
| Most people who take on debt believe they have a good reason to
| do so.
|
| It's like how almost nobody thinks of themselves as Evil.
| Everyone is doing their best, but nobody has the same
| yardstick.
| bdjsiqoocwk wrote:
| What does "wayward children" mean? I never heard this expression
| before.
| SkyMarshal wrote:
| This is essentially an explanation of "absorbing barriers" from
| ergodicity economics [1]. In ergodic systems, the ensemble
| average and time average are equivalent, but in non-ergodic
| systems (most of real life) they aren't. In non-ergodic systems,
| outcomes are path-dependent.
|
| An absorbing barrier [2] is like going all-in on a hand in poker
| and losing - you lose your entire bankroll, are out of the game,
| you stop progressing and have no more iterations. Your E[X] no
| longer incorporates the set of all possible steps or outcomes,
| but only the ones you actually experienced before incurring the
| absorbing barrier, making your real-life E[X] materially
| different from your theoretical one.
|
| [1]:https://ergodicityeconomics.com/
|
| [2]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance)
|
| [3]:https://www.nature.com/articles/s41567-019-0732-0
___________________________________________________________________
(page generated 2024-05-06 23:01 UTC)