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I wish more people thought this way. Debt can be be used effectively, but as Uncle Ben said, "With great power comes great responsibility." It seems that too m

I wish more people thought this way. Debt can be be used effectively, but as Uncle Ben said, "With great power comes great responsibility." It seems that too much of America is wooed into a false sense of security by their ability to obtain debt without judging their ability to pay that debt off.

bootload 10y ago
"I wish more people thought this way." It used to be common to view personal debt this way. I noticed a big change in the way debt was perceived by during the late '80s. Since then, debt is seen as normal. I'm pretty sure the finance industry has pushed 'Fractional reserve banking' to the limit to allow unchecked borrowing for land and housing. [0] Reference [0] "fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank" ~ https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- paulcole 10y ago
  There's also the rebranding of the scary "second-mortgage" into the treat-yourself "home-equity-line-of-credit."
  - bittercynic 10y ago
    Those are two distinct products. I think they're both scary ways to treat-yourself.
    - daemin 10y ago
      It's the way that consumer culture can grow, because you use your line of credit to buy a second or third car, nicer car, jet ski, boat, canoe, etc. Then when you have all of this stuff you have to buy a bigger property just so that you have space to store it. So that means selling your existing property to someone else to repeat the cycle. It is certainly an efficient way to keep money moving.
- soVeryTired 10y ago
  Fractional reserve banking doesn't really exist any more in the developed world. Banks lend against their capital, not their reserves [1]. [1] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
  - bootload 10y ago
    "In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves." thx @soVeryTired, plz excuse lack of financial knowledge. What is the definition of "reserves"?
    - soVeryTired 10y ago
      A bank's reserves are the funds it holds in its account in the central bank. Some countries require that a certain proportion of the bank's assets are held in reserve in order to be sure it can easily meet its short term liabilities (i.e. to safeguard liquidity). In that regard, the system is a little like fractional reserve banking. But the UK and Canada don't have reserve requirements at all. In general, the main constraint on a bank's lending is its capital. Which is why you read about "core tier 1 capital ratios" when a failing bank makes headlines.
      - bootload 10y ago
        "A bank's reserves are the funds it holds in its account in the central bank." Are those reserves (capital) fluid? From the tier-1 you refer I get the impression these are real physical assets and in flux. Interesting. How do the UK banks handle market runs? (I must read more about the banking system) In Aus major banks are government backed with minimal competition.
camillomiller 10y ago
It surprises me all the time to see what you can do with a CC in America. Here in Europe it's also very common to have a direct debit card. You don't have a monthly bill, but the amount you spend is directly deducted from your account. Lots of people prefer that.
- taurath 10y ago
  We have those here too, and I think it's relatively common to pay off of those.
- glandium 10y ago
  As coming from a country where debit cards are widespread (France), and living in one where they barely existed until recently (Japan), and having had my (japanese) debit card fraudulently used (still a mystery how ; not stolen, barely even used at all ; last use 8 months prior), I now know that credit cards are better in that case: if you notice the fraudulent use early enough, it's not going to hit your account, while I'm now stuck waiting for a reimbursment that will hopefully happen 3 months after reporting the event. Just for that, I now prefer a CC, not using the "Credit" part of it. Edit: well, technically, I'm using it, but only as a buffer. But it's always awkward to be asked "single payment?" for ridiculous amounts like $20. Huh, yeah, why? are people really paying such amounts in multiple installments?
- douche 10y ago
  The best option in the US is to use a credit card as if it were a debit card, and pay your balance off every month. This way, you get to take advantage of the better fraud protections, cash-back rewards, and balance-smoothing benefits of the credit card, without paying any intetest. And it improves your credit score. Unless you have no financial discipline, there's no reason to use debit over credit.
- lostboys67 10y ago
  Well until recently when the EU decided to "help" consumers I was making £20 a month by using my CC and paying it off in full each month. And credit cards (in the UK ) provide protection for buyers against shoddy goods
d_t_w 10y ago
I agree with your sentiment, but it strikes me that there is safety and opportunity in behaving badly when the bulk of your peers are swept away in an orgy of debt fuelled spending. Ten years ago I bought a small flat in London to live in. I paid a respectable deposit and didn't over-leverage. We were at the end of decade long property boom, there were huge concerns about the level of borrowing and ability to repay, predictions of mass repossessions if the BoE raised rates by even a quarter percent, the BoE would regularly "jaw-bone" the fact that the rate must rise[1]. The bank wanted to lend me 5x the amount I borrowed. I could have bought an entire 3 bedroom house rather than just a 1 bed flat situated in the same property. I borrowed within my bounds, priced the debt relative to an upward BoE rate, played it sensible. What a missed opportunity! In retrospect I should have taken all the cash the bank wanted to throw at me and bought the whole house. I would have been able to manage the repayments fine, and financially I would be light-years ahead of where I am now. All because the government will literally burn anyone to keep those vested in the housing market safe (particularly I reference the U.K/NZ/AU, I assume the U.S.A is similar). Behave badly in droves and the government will never raise that BoE rate. They will burn savers, they will continue to inflate the housing bubble, they will set fire to the hopes of anyone under the age of 30 buying a house to live in. Literally anything to save the retirement nest-egg of a generation of baby-boomers, aided and abetted by a generation of baby-boomer politicians. Only external factors will bring an end. In the U.K that may be Brexit (as external as that is), in AU that may be Chinese capital controls. Until those external factors are applied you're fine misbehaving. For me, behaving respectably was a mistake. [1] The rate today is 0.25%, an all-time historic low. The rate when I bought was 0.5%, at the time an all-time historic low. Saving in the U.K the last decade? Sucks to be you: https://qz.com/750443/the-bank-of-england-just-cut-interest-rates-after-seven-years-of-preparing-for-a-hike/ https://qz.com/750443/the-bank-of-england-just-cut-interest-...
- d_t_w 10y ago
  My language is a bit loose, of course the BoE is independent and controls the rate. But the government sets the BoE remit to use the rate to keep inflation within acceptable bounds, and Gordon Brown decided to move from RPI (which includes some measure of mortgage payments) to CPI (which doesn't). It does seem madness that we would control monetary supply without consideration of inflation in the largest asset group that lose monetary policy impacts (actual house prices, not just mortgage payments), but then I'm no economist so what do I know.
err4nt 10y ago
I view debt as gambling against future prosperity. It's a faustian deal you make with yourself to steal your own future earnings to use today. What a bittersweet deal (most of the time)
- mdpopescu 10y ago
  As a general rule, people in the future are richer than people in the past - both individually and at the society level. It is gambling, but history suggests that it generally works out.
  - Thrillington 10y ago
    Timescales are a bit off for that rule though. People are generally better off in a few years from now, unless they've been paying that extra prosperity to as monthly interest on their debt.
    - mdpopescu 10y ago
      If the interest is larger than the entire gain, sure. However, most people don't do that as far as I can tell from looking around me.
charlieflowers 10y ago
Most Americans are using debt to buy consumer goods. So the question most should ask themselves is, "As a citizen of a first world country, with a good job and a super high standard of living, why is it that I need to consume some of tomorrow's dollars to get myself even more stuff right now?"
- shostack 10y ago
  Then there's the flip side of using credit cards to get a 1%+ discount on things and paying it off in full. If you have the cash and discipline, debt can be used for very low risk benefit.
  - taurath 10y ago
    And CC companies bank on the fact that if even a small percentage of people aren't able to pay it off in full they'll get their "rewards" back in full within a single period of interest.
    - ctrlrsf 10y ago
      They also bank of the fact that you will use your plastic for more frivolous purchases since it's so convenient. Plus you think you're getting some cash back reward later, so you don't feel so bad about it. If you had to pay cash, you might not be wasting as much money.
    - someguydave 10y ago
      no they make 1-5% of every swipe
      - WesleyLivesay 10y ago
        Yep, they make money either way. However, it only takes 1 person carrying a balance at 20% to make up for the rewards of 20 people who spend and pay off.
- adrianN 10y ago
lastyearman 10y ago
Debt is new currency. If everyone is buying their cars with credit, soon nobody can afford to buy with cash. Around here even if you have decent wage right now, but not a stable job, you can't get credit to buy a house, while someone with a low pay but stable job can, you're effectively poorer than them.
- WJW 10y ago
  You seem to appraise the stability of a job as having zero (or at least very low) value. This might be justified if you are certain that you can get a new job in a short term if you lose the current one. However, from the banks' viewpoint the probability of you getting a new job soon enough to not miss any payments may be appraised much lower, possibly being influenced by other economic sectors where getting a new job takes much longer. Banks have interest and dividend payments to make themselves, so they obviously place a high value on stability. So yes, someone with a lower paying but more stable job may be more wealthy than someone with a higher paying but more unstable job. Appraising the current net value of a job is always a bit shaky though, because there are so many variables.

bootload 10y ago

"I wish more people thought this way." It used to be common to view personal debt this way. I noticed a big change in the way debt was perceived by during the late '80s. Since then, debt is seen as normal. I'm pretty sure the finance industry has pushed 'Fractional reserve banking' to the limit to allow unchecked borrowing for land and housing. [0] Reference [0] "fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank" ~ https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

paulcole 10y ago
There's also the rebranding of the scary "second-mortgage" into the treat-yourself "home-equity-line-of-credit."
- bittercynic 10y ago
  Those are two distinct products. I think they're both scary ways to treat-yourself.
  - daemin 10y ago
    It's the way that consumer culture can grow, because you use your line of credit to buy a second or third car, nicer car, jet ski, boat, canoe, etc. Then when you have all of this stuff you have to buy a bigger property just so that you have space to store it. So that means selling your existing property to someone else to repeat the cycle. It is certainly an efficient way to keep money moving.
soVeryTired 10y ago
Fractional reserve banking doesn't really exist any more in the developed world. Banks lend against their capital, not their reserves [1]. [1] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
- bootload 10y ago
  "In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves." thx @soVeryTired, plz excuse lack of financial knowledge. What is the definition of "reserves"?
  - soVeryTired 10y ago
    A bank's reserves are the funds it holds in its account in the central bank. Some countries require that a certain proportion of the bank's assets are held in reserve in order to be sure it can easily meet its short term liabilities (i.e. to safeguard liquidity). In that regard, the system is a little like fractional reserve banking. But the UK and Canada don't have reserve requirements at all. In general, the main constraint on a bank's lending is its capital. Which is why you read about "core tier 1 capital ratios" when a failing bank makes headlines.
    - bootload 10y ago
      "A bank's reserves are the funds it holds in its account in the central bank." Are those reserves (capital) fluid? From the tier-1 you refer I get the impression these are real physical assets and in flux. Interesting. How do the UK banks handle market runs? (I must read more about the banking system) In Aus major banks are government backed with minimal competition.

camillomiller 10y ago

It surprises me all the time to see what you can do with a CC in America. Here in Europe it's also very common to have a direct debit card. You don't have a monthly bill, but the amount you spend is directly deducted from your account. Lots of people prefer that.

taurath 10y ago
We have those here too, and I think it's relatively common to pay off of those.
glandium 10y ago
As coming from a country where debit cards are widespread (France), and living in one where they barely existed until recently (Japan), and having had my (japanese) debit card fraudulently used (still a mystery how ; not stolen, barely even used at all ; last use 8 months prior), I now know that credit cards are better in that case: if you notice the fraudulent use early enough, it's not going to hit your account, while I'm now stuck waiting for a reimbursment that will hopefully happen 3 months after reporting the event. Just for that, I now prefer a CC, not using the "Credit" part of it. Edit: well, technically, I'm using it, but only as a buffer. But it's always awkward to be asked "single payment?" for ridiculous amounts like $20. Huh, yeah, why? are people really paying such amounts in multiple installments?
douche 10y ago
The best option in the US is to use a credit card as if it were a debit card, and pay your balance off every month. This way, you get to take advantage of the better fraud protections, cash-back rewards, and balance-smoothing benefits of the credit card, without paying any intetest. And it improves your credit score. Unless you have no financial discipline, there's no reason to use debit over credit.
lostboys67 10y ago
Well until recently when the EU decided to "help" consumers I was making £20 a month by using my CC and paying it off in full each month. And credit cards (in the UK ) provide protection for buyers against shoddy goods

d_t_w 10y ago

I agree with your sentiment, but it strikes me that there is safety and opportunity in behaving badly when the bulk of your peers are swept away in an orgy of debt fuelled spending. Ten years ago I bought a small flat in London to live in. I paid a respectable deposit and didn't over-leverage. We were at the end of decade long property boom, there were huge concerns about the level of borrowing and ability to repay, predictions of mass repossessions if the BoE raised rates by even a quarter percent, the BoE would regularly "jaw-bone" the fact that the rate must rise[1]. The bank wanted to lend me 5x the amount I borrowed. I could have bought an entire 3 bedroom house rather than just a 1 bed flat situated in the same property. I borrowed within my bounds, priced the debt relative to an upward BoE rate, played it sensible. What a missed opportunity! In retrospect I should have taken all the cash the bank wanted to throw at me and bought the whole house. I would have been able to manage the repayments fine, and financially I would be light-years ahead of where I am now. All because the government will literally burn anyone to keep those vested in the housing market safe (particularly I reference the U.K/NZ/AU, I assume the U.S.A is similar). Behave badly in droves and the government will never raise that BoE rate. They will burn savers, they will continue to inflate the housing bubble, they will set fire to the hopes of anyone under the age of 30 buying a house to live in. Literally anything to save the retirement nest-egg of a generation of baby-boomers, aided and abetted by a generation of baby-boomer politicians. Only external factors will bring an end. In the U.K that may be Brexit (as external as that is), in AU that may be Chinese capital controls. Until those external factors are applied you're fine misbehaving. For me, behaving respectably was a mistake. [1] The rate today is 0.25%, an all-time historic low. The rate when I bought was 0.5%, at the time an all-time historic low. Saving in the U.K the last decade? Sucks to be you: https://qz.com/750443/the-bank-of-england-just-cut-interest-rates-after-seven-years-of-preparing-for-a-hike/ https://qz.com/750443/the-bank-of-england-just-cut-interest-...

d_t_w 10y ago
My language is a bit loose, of course the BoE is independent and controls the rate. But the government sets the BoE remit to use the rate to keep inflation within acceptable bounds, and Gordon Brown decided to move from RPI (which includes some measure of mortgage payments) to CPI (which doesn't). It does seem madness that we would control monetary supply without consideration of inflation in the largest asset group that lose monetary policy impacts (actual house prices, not just mortgage payments), but then I'm no economist so what do I know.

err4nt 10y ago

I view debt as gambling against future prosperity. It's a faustian deal you make with yourself to steal your own future earnings to use today. What a bittersweet deal (most of the time)

mdpopescu 10y ago
As a general rule, people in the future are richer than people in the past - both individually and at the society level. It is gambling, but history suggests that it generally works out.
- Thrillington 10y ago
  Timescales are a bit off for that rule though. People are generally better off in a few years from now, unless they've been paying that extra prosperity to as monthly interest on their debt.
  - mdpopescu 10y ago
    If the interest is larger than the entire gain, sure. However, most people don't do that as far as I can tell from looking around me.

charlieflowers 10y ago

Most Americans are using debt to buy consumer goods. So the question most should ask themselves is, "As a citizen of a first world country, with a good job and a super high standard of living, why is it that I need to consume some of tomorrow's dollars to get myself even more stuff right now?"

shostack 10y ago
Then there's the flip side of using credit cards to get a 1%+ discount on things and paying it off in full. If you have the cash and discipline, debt can be used for very low risk benefit.
- taurath 10y ago
  And CC companies bank on the fact that if even a small percentage of people aren't able to pay it off in full they'll get their "rewards" back in full within a single period of interest.
  - ctrlrsf 10y ago
    They also bank of the fact that you will use your plastic for more frivolous purchases since it's so convenient. Plus you think you're getting some cash back reward later, so you don't feel so bad about it. If you had to pay cash, you might not be wasting as much money.
  - someguydave 10y ago
    no they make 1-5% of every swipe
    - WesleyLivesay 10y ago
      Yep, they make money either way. However, it only takes 1 person carrying a balance at 20% to make up for the rewards of 20 people who spend and pay off.
adrianN 10y ago

lastyearman 10y ago

Debt is new currency. If everyone is buying their cars with credit, soon nobody can afford to buy with cash. Around here even if you have decent wage right now, but not a stable job, you can't get credit to buy a house, while someone with a low pay but stable job can, you're effectively poorer than them.

WJW 10y ago
You seem to appraise the stability of a job as having zero (or at least very low) value. This might be justified if you are certain that you can get a new job in a short term if you lose the current one. However, from the banks' viewpoint the probability of you getting a new job soon enough to not miss any payments may be appraised much lower, possibly being influenced by other economic sectors where getting a new job takes much longer. Banks have interest and dividend payments to make themselves, so they obviously place a high value on stability. So yes, someone with a lower paying but more stable job may be more wealthy than someone with a higher paying but more unstable job. Appraising the current net value of a job is always a bit shaky though, because there are so many variables.