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Looking at principal balances is all wrong. GDP means nothing in this instance either. What matters, and what lenders look at, is debt serviceability. Lenders

Looking at principal balances is all wrong. GDP means nothing in this instance either. What matters, and what lenders look at, is debt serviceability. Lenders don't want principal paid back, ideally you just keep paying interest for life. Let's say median household: Income: $4000/mo Rent: $1500/mo Other necessities: $2000/mo Let's say $500/mo "disposable." It's from this that the interest needs to be paid to service the debt on that $12,600 (actually, that's per person; there are 2.53 people in the median household, so $32k debt). What's the average interest rate? Maybe 10%? That's $266/month just for interest. Now, economy goes into recession, consumer loses income and will first stop paying unsecured debt (credit cards, student loans), then auto loan until repo, then finally mortgage. And keep in mind median American doesn't have a lot of liquid savings to cushion. If there's anything, it's in 401k or home equity - and now is not a good time to sell. But many are forced to, further increasing supply when buyers are scared off, so prices keep declining. Everything starts to be sold and assets get repriced. More seized cars at auction. More foreclosed houses. Banks restrict credit. Everything spirals down, quickly. Cashed up HNW investors willing to take the risk buy up firesale assets with cash and hold them. Maybe prices recover eventually, but now more assets are held by fewer people, and you've moved further into inequality. The US is very much a credit driven economy. That's why the credit crunch of 2007 had such a severe impact. This just happened a decade ago, and it seems people have already forgotten what it's like.

Shivetya 10y ago
A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed and convince otherwise rational people to make an irrational decision which has them take on more debt. from buying too much house or car to over buying an education that cannot be used where the person is or in a field that cannot withstand the costs. all of these are marketed products. all three have vary optional levels of how much they cost. then add in all the monthly bills and this is where many people miscalculate and it snow balls. from cell to internet to even television. you can quickly end up paying a significant amount of your income that has no tangible return.
- thechao 10y ago
  My lesson in financial responsibility was to have to live on 8000--10000$/year for three years. Coming from a solidly middle class income, it was a real shock. I am very credit averse, now, since even a modest level of credit sunk as fixed cost with no benefit.
  - throwaway5752 10y ago
    Buy everything with credit card. Establish your credit rating in case you need to borrow, and take advantage of whatever reward program fits you best. Always pay of the entirety of your balance every month.
- FullMtlAlcoholc 10y ago
  > convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-averse in terms of gains. [B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500. 2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500. Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses. Couple this with the number of people who actually understand the concept of compounded interest rates and yikes. Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.
  - ericd 10y ago
    Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.
brandmeyer 10y ago
> What matters, and what lenders look at, is debt serviceability. Quite true. But it also implies something else: Because the disparity of income levels in the US is so broad, just talking about the problem in terms of national totals and averages is useless. Show me the problem divided up by quantiles of the population, maybe even log-scaled as you get closer to the top, and then I might believe that there's a problem.
- jeffdavis 10y ago
  Don't look at quantiles, look at people over time. Quantiles conflate poor working families with middle-class college students.
bla2 10y ago
The median household probably has to pay taxes too.
mcguire 10y ago
See Fisher's theory of debt deflation: https://en.m.wikipedia.org/wiki/Debt_deflation https://en.m.wikipedia.org/wiki/Debt_deflation

Shivetya 10y ago

A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed and convince otherwise rational people to make an irrational decision which has them take on more debt. from buying too much house or car to over buying an education that cannot be used where the person is or in a field that cannot withstand the costs. all of these are marketed products. all three have vary optional levels of how much they cost. then add in all the monthly bills and this is where many people miscalculate and it snow balls. from cell to internet to even television. you can quickly end up paying a significant amount of your income that has no tangible return.

thechao 10y ago
My lesson in financial responsibility was to have to live on 8000--10000$/year for three years. Coming from a solidly middle class income, it was a real shock. I am very credit averse, now, since even a modest level of credit sunk as fixed cost with no benefit.
- throwaway5752 10y ago
  Buy everything with credit card. Establish your credit rating in case you need to borrow, and take advantage of whatever reward program fits you best. Always pay of the entirety of your balance every month.
FullMtlAlcoholc 10y ago
> convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-averse in terms of gains. [B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500. 2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500. Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses. Couple this with the number of people who actually understand the concept of compounded interest rates and yikes. Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.
- ericd 10y ago
  Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.

brandmeyer 10y ago

> What matters, and what lenders look at, is debt serviceability. Quite true. But it also implies something else: Because the disparity of income levels in the US is so broad, just talking about the problem in terms of national totals and averages is useless. Show me the problem divided up by quantiles of the population, maybe even log-scaled as you get closer to the top, and then I might believe that there's a problem.

jeffdavis 10y ago
Don't look at quantiles, look at people over time. Quantiles conflate poor working families with middle-class college students.

bla2 10y ago

The median household probably has to pay taxes too.

mcguire 10y ago

See Fisher's theory of debt deflation: https://en.m.wikipedia.org/wiki/Debt_deflation https://en.m.wikipedia.org/wiki/Debt_deflation