7 ms·

Throughout history, every time loans are invented to pay for something, the price skyrockets. House, Cars, Education... except credit cards. What credit cards d

by chimi 7y ago

Throughout history, every time loans are invented to pay for something, the price skyrockets. House, Cars, Education... except credit cards. What credit cards did is flatten the salary curve, filling the gap between where salaries should be if they increased as much or more than inflation and the cost of living, with debt. Debt is a powerful tool when used correctly, but most people are unskilled in tool use, financial equations and themselves thus, debt is a Market for Lemons. Consumers do not know what they are buying. They are buying cash and paying for it with future income. People are generally more optimistic about their futures and irrationally excited about what they consume. The banks have been allowed to sell cash with impunity. We have to stop that. We're just cooking the books as an entire society.

jeffdavis 7y ago
"People are generally more optimistic about their futures and irrationally excited about what they consume." I don't think that's quite it. People get comfort from following a plan. Go to college, take a bunch of loans, and it will all work out. They think if it doesn't, someone will bail them out because they followed the plan. Everyone else is in the same boat anyway, and maybe one of them will find a solution, or they can band together and demand something from someone else. That doesn't line up with reality though. A lot of people do get left behind. The people with the "plan" are nowhere to be found, and were just repeating what worked for them without looking at the new numbers.
wholepointofcc 7y ago
> Debt is a powerful tool when used correctly, Could you expand on that? It's a very interesting perspective
- FrozenTuna 7y ago
  Companies (and people) take on debt to invest in themselves, knowing the growth can (hopefully) pay off the debt and generate more income in the long run. Here's a fun list of companies with debt: https://wolfstreet.com/2019/07/26/the-most-indebted-companies-in-america/ https://wolfstreet.com/2019/07/26/the-most-indebted-companie... In the case of students, the idea is to take some debt now and pay it off with increased earnings. The problem is, those increased earnings aren't guaranteed and students are way worse at determining the return on their debt than companies with dedicated teams.
- wholepointofcc 7y ago
  Thank you FrozenTuna for your input but I was specifically thinking of physical people, as opposed to companies. I also meant a more specific application rather than a general iteration on the (perfectly valid) idea that if one can make more money with a value now, rather than later, and this opportunity cost is larger than the interest rate minus inflation, then the deal is good. Student loans would be a good example of that in a well-functioning market. Are there many others?
  - chimi 7y ago
    Companies are people, legally speaking, but I see your point. See ours: Imagine yourself as a company and the same debt equation applies. Companies, like you, need tools to produce goods and maintain their operations. You, if you're a programmer, need a computer. You don't have $1000 to buy one, but you have a credit card. You know, you can bill your hours out at say, $100/hr writing code. You need to write code for 10 hours to pay for the machine, but you don't have $1000 to buy the machine. So you put $1000 on a credit card at 20% interest, buy the computer and then bill 100 hours on it @ $100 / hr = $10,000 in just one month. You incurred a little bit of debt, bought something worth a lot, but worth a lot more to you because you can leverage that tool to make more money than it cost to buy the tool. Think of debt as leverage. It's a little bit of money pressing down on a lever to lift more money into your pocket. If you only use that leverage to buy assets that help you make money (fairly easy) or increase in value at a rate greater than the interest rate (difficult, risky, speculative), then your net worth will continue to grow. That college degree in a practical field like engineering is an asset because you will leverage it to earn more money over your lifetime than you would without that degree. Compare this to a degree in the proverbial "basket weaving." You, in your lifetime, will never weave $400,000 worth of baskets you'd need to pay for that University of Chicago degree. That degree is a liability that will follow you, perhaps your entire life and might make your life worse than it would be had you never gotten it at all. You'll resent that degree so much you refuse to work because every penny goes to some bank that sold you a worthless piece of paper for $400,000.
    - jlawson 7y ago
      Companies aren't people, legally speaking. This is a bizarre myth that just gets repeated as a sort of mindless anti-corporate shibboleth. Companies are legal entities which can sign contracts, hold debt, open bank accounts, etc. So are government agencies, unions, churches, mosques, guilds, charities. Does that means these are all people, legally speaking? For some reason nobody says 'the IRS is a person, legally speaking'. Companies cannot marry, vote, file taxes as a human, get a passport or driver's license etc, because they are not human, legally speaking. They're just legal entities, as people also are, but of different types. Don't get confused about the words used in the legal world around 'natural persons' etc; legal usages of words don't carry their common meaning and there are lots of examples of this you know.
narrator 7y ago
The boom and bust cycle is a feature not a bug. Here's money, go make stuff. You think it's yours, but we'll eventually take it all back in the bust. The money we lost we created out of thin air.
apta 7y ago
> Throughout history, every time loans are invented to pay for something, the price skyrockets. Which is why interest-bearing loans are prohibited in the three major religions. Puts things into perspective.
- glerk 7y ago
  Which major religion other than Islam forbids it?
  - richardknop 7y ago
    It's been some time since my Bible studies but isn't there something in the Old Testament against loans / lending money with interest?
    - wolco 7y ago
      No. It says the borrower is a slave to the lender and to be aware. But it is not against the Church.
      - apta 7y ago
        Leviticus 25:36-37 says otherwise.
    - apta 7y ago
      According to the following, it's prohibited: [1] https://bible.oremus.org/?passage=Leviticus+25:36%E2%80%9325:37&version=nrsv https://bible.oremus.org/?passage=Leviticus+25:36%E2%80%9325... [2] https://bible.oremus.org/?passage=Exodus+22:25 https://bible.oremus.org/?passage=Exodus+22:25
  - solotronics 7y ago
    Usury was prohibited in Christianity until not that long ago. "At the time, usury was interest of any kind, and the canon forbade the clergy to lend money at interest rates even as low as 1 percent per year. Later ecumenical councils applied this regulation to the laity." - https://www.jstor.org/stable/3161033?seq=1#page_scan_tab_contents https://www.jstor.org/stable/3161033?seq=1#page_scan_tab_con...
romwell 7y ago
>They are buying cash and paying for it with future income. Yes, that's what interest is, and it often makes sense. There's a lot of value of having something (that you buy with money) available to you now rather than in a couple of years - especially if the means to make money depends that item (be it a car, education, a tractor, a musical instrument, set of tools, or what not). Also, there was a lot of value for me to travel when I was a grad student and had a much more flexible schedule - and, frankly, was younger. I wish I took out loans for that, paying them off now that I'm working full time would not be a burden. But while you rob your future self by taking a loan, you can't donate anything to your former self no matter how much you have. TL;DR: there's value for people in having the right things at the right time.

by chimi 7y ago

jeffdavis 7y ago

"People are generally more optimistic about their futures and irrationally excited about what they consume." I don't think that's quite it. People get comfort from following a plan. Go to college, take a bunch of loans, and it will all work out. They think if it doesn't, someone will bail them out because they followed the plan. Everyone else is in the same boat anyway, and maybe one of them will find a solution, or they can band together and demand something from someone else. That doesn't line up with reality though. A lot of people do get left behind. The people with the "plan" are nowhere to be found, and were just repeating what worked for them without looking at the new numbers.

wholepointofcc 7y ago

> Debt is a powerful tool when used correctly, Could you expand on that? It's a very interesting perspective

FrozenTuna 7y ago
Companies (and people) take on debt to invest in themselves, knowing the growth can (hopefully) pay off the debt and generate more income in the long run. Here's a fun list of companies with debt: https://wolfstreet.com/2019/07/26/the-most-indebted-companies-in-america/ https://wolfstreet.com/2019/07/26/the-most-indebted-companie... In the case of students, the idea is to take some debt now and pay it off with increased earnings. The problem is, those increased earnings aren't guaranteed and students are way worse at determining the return on their debt than companies with dedicated teams.
wholepointofcc 7y ago
Thank you FrozenTuna for your input but I was specifically thinking of physical people, as opposed to companies. I also meant a more specific application rather than a general iteration on the (perfectly valid) idea that if one can make more money with a value now, rather than later, and this opportunity cost is larger than the interest rate minus inflation, then the deal is good. Student loans would be a good example of that in a well-functioning market. Are there many others?
- chimi 7y ago
  Companies are people, legally speaking, but I see your point. See ours: Imagine yourself as a company and the same debt equation applies. Companies, like you, need tools to produce goods and maintain their operations. You, if you're a programmer, need a computer. You don't have $1000 to buy one, but you have a credit card. You know, you can bill your hours out at say, $100/hr writing code. You need to write code for 10 hours to pay for the machine, but you don't have $1000 to buy the machine. So you put $1000 on a credit card at 20% interest, buy the computer and then bill 100 hours on it @ $100 / hr = $10,000 in just one month. You incurred a little bit of debt, bought something worth a lot, but worth a lot more to you because you can leverage that tool to make more money than it cost to buy the tool. Think of debt as leverage. It's a little bit of money pressing down on a lever to lift more money into your pocket. If you only use that leverage to buy assets that help you make money (fairly easy) or increase in value at a rate greater than the interest rate (difficult, risky, speculative), then your net worth will continue to grow. That college degree in a practical field like engineering is an asset because you will leverage it to earn more money over your lifetime than you would without that degree. Compare this to a degree in the proverbial "basket weaving." You, in your lifetime, will never weave $400,000 worth of baskets you'd need to pay for that University of Chicago degree. That degree is a liability that will follow you, perhaps your entire life and might make your life worse than it would be had you never gotten it at all. You'll resent that degree so much you refuse to work because every penny goes to some bank that sold you a worthless piece of paper for $400,000.
  - jlawson 7y ago
    Companies aren't people, legally speaking. This is a bizarre myth that just gets repeated as a sort of mindless anti-corporate shibboleth. Companies are legal entities which can sign contracts, hold debt, open bank accounts, etc. So are government agencies, unions, churches, mosques, guilds, charities. Does that means these are all people, legally speaking? For some reason nobody says 'the IRS is a person, legally speaking'. Companies cannot marry, vote, file taxes as a human, get a passport or driver's license etc, because they are not human, legally speaking. They're just legal entities, as people also are, but of different types. Don't get confused about the words used in the legal world around 'natural persons' etc; legal usages of words don't carry their common meaning and there are lots of examples of this you know.

narrator 7y ago

The boom and bust cycle is a feature not a bug. Here's money, go make stuff. You think it's yours, but we'll eventually take it all back in the bust. The money we lost we created out of thin air.

apta 7y ago

> Throughout history, every time loans are invented to pay for something, the price skyrockets. Which is why interest-bearing loans are prohibited in the three major religions. Puts things into perspective.

glerk 7y ago
Which major religion other than Islam forbids it?
- richardknop 7y ago
  It's been some time since my Bible studies but isn't there something in the Old Testament against loans / lending money with interest?
  - wolco 7y ago
    No. It says the borrower is a slave to the lender and to be aware. But it is not against the Church.
    - apta 7y ago
      Leviticus 25:36-37 says otherwise.
  - apta 7y ago
    According to the following, it's prohibited: [1] https://bible.oremus.org/?passage=Leviticus+25:36%E2%80%9325:37&version=nrsv https://bible.oremus.org/?passage=Leviticus+25:36%E2%80%9325... [2] https://bible.oremus.org/?passage=Exodus+22:25 https://bible.oremus.org/?passage=Exodus+22:25
- solotronics 7y ago
  Usury was prohibited in Christianity until not that long ago. "At the time, usury was interest of any kind, and the canon forbade the clergy to lend money at interest rates even as low as 1 percent per year. Later ecumenical councils applied this regulation to the laity." - https://www.jstor.org/stable/3161033?seq=1#page_scan_tab_contents https://www.jstor.org/stable/3161033?seq=1#page_scan_tab_con...

romwell 7y ago

>They are buying cash and paying for it with future income. Yes, that's what interest is, and it often makes sense. There's a lot of value of having something (that you buy with money) available to you now rather than in a couple of years - especially if the means to make money depends that item (be it a car, education, a tractor, a musical instrument, set of tools, or what not). Also, there was a lot of value for me to travel when I was a grad student and had a much more flexible schedule - and, frankly, was younger. I wish I took out loans for that, paying them off now that I'm working full time would not be a burden. But while you rob your future self by taking a loan, you can't donate anything to your former self no matter how much you have. TL;DR: there's value for people in having the right things at the right time.