4 ms·

the big problem for the US is the American consumer. For the last 20 years the average American has been using $1.10 for every dollar made. This has been possib

by mixmax 16y ago

the big problem for the US is the American consumer. For the last 20 years the average American has been using $1.10 for every dollar made. This has been possible due to cheap loans and rising real estate prices. The bare truth is that for the last many years America, and to some extent Europe, has been living well beyond its means.

alecco 16y ago
That's not necessarily bad. As long it's credit for durable goods not experiencing bubbled up prices. There's good and bad leverage. Good leverage is essential to develop a healthy economy.
- mixmax 16y ago
  I entirely agree that borrowing for durable goods isn't a bad idea if you can afford it. My argument is that for the last many years normal households have been buying stuff they can't afford with money they don't have. And now that the housing prices aren't rising anymore they have serious trouble since they can't take out another mortgage on their house.
- RyanMcGreal 16y ago
  Cars != durable goods.
  - trenton 16y ago
    Econ 101: product with a life span of at least 3 years. http://www.esa.doc.gov/about-economic-indicators http://www.esa.doc.gov/about-economic-indicators http://en.wikipedia.org/wiki/Durable_good http://en.wikipedia.org/wiki/Durable_good
    - RyanMcGreal 16y ago
      Yes, you're correct by the definition. I was thinking in terms similar to those articulated more clearly in this comment by RyanHolliday: http://news.ycombinator.com/item?id=2284071 http://news.ycombinator.com/item?id=2284071 A car loses 30% of its value as you roll it off the lot, and it continues losing value steadily until the cost of keeping it on the road surpasses the cost of buying a replacement.
- RyanHolliday 16y ago
  The thing that's important here is the definition of "durable goods," I think. It makes the discussion a lot simpler if we avoid the "doesn't wear out quickly" definition and use the "yields utility over time." The thing of it is, there really aren't many (if any) goods purchased by consumers that are genuinely durable goods under that definition. Houses, possibly, but we clearly know that can turn out badly. Everything else. . . . well, everything else depreciates, most often quickly. Cars, televisions, appliances, and so on. There just isn't a return on investment in terms of dollars and cents for consumer purchases that justifies the use of debt. If a business borrows money, they're just leveraging to increase profits. If a consumer borrows money, it's typically because they're not patient enough to wait until they have the cash (been there, done that, know from personal experience). Anyway, the point of everything I said is to say this: I don't think there's good leverage for consumers, with the possible exception of student loans and a mortgage (for a reasonable house!). Everything else is just impatience. EDIT: Given my school loans I'm actually pretty skeptical of the utility of student debt, too.
  - sokoloff 16y ago
    I don't entirely disagree, but I will observe that if you have have to borrow money for a water heater, furnace, toilet, cooktop, refrigerator or similar (because you lack one that works), that's almost certainly a wise thing to do. Same with a car if you need a reliable car to get to (or perform [pizza delivery]) your employment. I don't know that financiers would call that leverage or not, but not all consumer borrowing is irresponsible or even EV-negative. I wouldn't characterize the purchases of items like that on credit as impatience.
    - dedward 16y ago
      Yes - credit for emergency situations - but even in those cases, it's only correct if you are spending within your means. A cooktop/toilet/refrigerator or similar are not that expensive - people should have at least several months of cushion money in the bank after they've been in the workforce for a few years... there should be no need to live paycheck to paycheck and borrow at absurd rates on credit cards.
hessenwolf 16y ago
If at some stage, the money goes into improving productive capacity, then it is not too bad. The consumers themselves may not be increasing productive capacity, and in my opinion are generally not, but the companies their money goes to often are. US purchasing power parity GDP per capita is in the top ten in world. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP... This seems to me as good a measure of productive capacity as any. The consumers of the US may be borrowing heavily, but the previously borrowed money mustn't all have been pissed down the drain.

by mixmax 16y ago

alecco 16y ago

That's not necessarily bad. As long it's credit for durable goods not experiencing bubbled up prices. There's good and bad leverage. Good leverage is essential to develop a healthy economy.

mixmax 16y ago
I entirely agree that borrowing for durable goods isn't a bad idea if you can afford it. My argument is that for the last many years normal households have been buying stuff they can't afford with money they don't have. And now that the housing prices aren't rising anymore they have serious trouble since they can't take out another mortgage on their house.
RyanMcGreal 16y ago
Cars != durable goods.
- trenton 16y ago
  Econ 101: product with a life span of at least 3 years. http://www.esa.doc.gov/about-economic-indicators http://www.esa.doc.gov/about-economic-indicators http://en.wikipedia.org/wiki/Durable_good http://en.wikipedia.org/wiki/Durable_good
  - RyanMcGreal 16y ago
    Yes, you're correct by the definition. I was thinking in terms similar to those articulated more clearly in this comment by RyanHolliday: http://news.ycombinator.com/item?id=2284071 http://news.ycombinator.com/item?id=2284071 A car loses 30% of its value as you roll it off the lot, and it continues losing value steadily until the cost of keeping it on the road surpasses the cost of buying a replacement.
RyanHolliday 16y ago
The thing that's important here is the definition of "durable goods," I think. It makes the discussion a lot simpler if we avoid the "doesn't wear out quickly" definition and use the "yields utility over time." The thing of it is, there really aren't many (if any) goods purchased by consumers that are genuinely durable goods under that definition. Houses, possibly, but we clearly know that can turn out badly. Everything else. . . . well, everything else depreciates, most often quickly. Cars, televisions, appliances, and so on. There just isn't a return on investment in terms of dollars and cents for consumer purchases that justifies the use of debt. If a business borrows money, they're just leveraging to increase profits. If a consumer borrows money, it's typically because they're not patient enough to wait until they have the cash (been there, done that, know from personal experience). Anyway, the point of everything I said is to say this: I don't think there's good leverage for consumers, with the possible exception of student loans and a mortgage (for a reasonable house!). Everything else is just impatience. EDIT: Given my school loans I'm actually pretty skeptical of the utility of student debt, too.
- sokoloff 16y ago
  I don't entirely disagree, but I will observe that if you have have to borrow money for a water heater, furnace, toilet, cooktop, refrigerator or similar (because you lack one that works), that's almost certainly a wise thing to do. Same with a car if you need a reliable car to get to (or perform [pizza delivery]) your employment. I don't know that financiers would call that leverage or not, but not all consumer borrowing is irresponsible or even EV-negative. I wouldn't characterize the purchases of items like that on credit as impatience.
  - dedward 16y ago
    Yes - credit for emergency situations - but even in those cases, it's only correct if you are spending within your means. A cooktop/toilet/refrigerator or similar are not that expensive - people should have at least several months of cushion money in the bank after they've been in the workforce for a few years... there should be no need to live paycheck to paycheck and borrow at absurd rates on credit cards.

hessenwolf 16y ago

If at some stage, the money goes into improving productive capacity, then it is not too bad. The consumers themselves may not be increasing productive capacity, and in my opinion are generally not, but the companies their money goes to often are. US purchasing power parity GDP per capita is in the top ten in world. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP... This seems to me as good a measure of productive capacity as any. The consumers of the US may be borrowing heavily, but the previously borrowed money mustn't all have been pissed down the drain.