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Take cars, no one buys a new car with cash anymore - they are all financed which means people can afford to spend more on a car, which means cars are more expen

Take cars, no one buys a new car with cash anymore - they are all financed which means people can afford to spend more on a car, which means cars are more expensive. Cheap finance is the fuel to inflation and corporations love dousing those flames and getting their revenue figures higher.

fiftyfifty 5y ago
This is because when a bank loans out money in most modern countries they in turn borrow the money from a federal reserve bank which in turn just creates the money to be loaned out. This is how federal reserve banks create more money. The idea being that loans drive the economy through building businesses and infrastructure but it also has the side effect of driving up the cost (inflation) for consumers of everything that can be paid for with loans: houses, cars and higher education and most of those things don't grow the economy in the same way a business loan would.
- HPsquared 5y ago
  Commercial banks are where money is created. When a commercial bank 'makes' a loan, they do just that: increase the balance in the borrower's account (from the bank's perspective, this is counted as a liability), and the loan contract is also created (this is effectively a bond issued by the borrower, which is an asset now held by the bank). In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money. This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).
iso1631 5y ago
I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc. If I can get that for $200/month for a new car for 3 years then hand it back, with just known costs of insurance and gas, that's valuable. I don't care what the cost of the car is, only what the cash flow is. Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't. Interest rates have been at record lows for over a decade, but the cost of the basket of goods the typical person buys hasn't changed much.
- ed_elliott_asc 5y ago
  I'm in the UK and I have really noticed in the last few months that life is getting more expensive - eating out is 10-20% more, groceries are up 10-20%. Now this is partly brexit, partly covid, partly we stopped doing anything for months - I can see people getting a bit of a shock when they realise that everything has gone up (the RPI in the UK is the average cost of a set of items in a basket and this confirms it, massive drop last year and now higher than the trend line shows it should have been: https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j5c4/drsi https://www.ons.gov.uk/businessindustryandtrade/retailindust...) - will be interesting to see if this drops down again next year
  - iso1631 5y ago
    Our grocery bill is actually down over 18 months, and we rarely eat out but I comments how surprisingly cheap it was yesterday. RPI is not used by anyone as a serious measure of inflation, CPIH is the standard used and it's been really low for donkey's years
- deleted 5y ago
  [deleted]
- reducesuffering 5y ago
  > I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc. No need to waste money on a lease. Just buy a used Toyota at effectively 30-50% the cost of that lease you're getting.
georgeecollins 5y ago
Buying a car with a loan or a lease is wealth destroying. I don't care whether most people do it or not. If you are smart enough to be reading Hacker News you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used. Buy a beater if you have to. No wealthy or financially savvy person is impressed because you leased a nice car.
- HWR_14 5y ago
  > you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used. This is nonsense. If you can borrow money for less than you can earn, you should borrow. I know people who, buying a new car, had saved cash to do so. But they got 0% financing. So even sticking that money in a CD made them more cash. What you mean to say is "if you do not realize that you are paying a lot of money for the use of a new car, not for an asset"
  - georgeecollins 5y ago
    >> If you can borrow money for less than you can earn, you should borrow. You are right, but using a car loan to do this makes no sense. You can always get a lower interest rate loan against real estate or margin loans against stocks. Show me any real world lender that won't loan you money at cheaper rates against those assets than they will against a car. Sure, people get 0% loans on cars, but if you think they that doesn't mean they paid more for the car than they could have with cash up front.. well I can't help you. You are trying to make an economic argument and I don't find it very convincing. But in the real world every time have I seen this happen it is to rationalize overspending.
    - HWR_14 5y ago
      > if you think they that doesn't mean they paid more for the car than they could have with cash up front. They certainly don't pay more for the car than they do if they paid with cash up front. The price of the car is negotiated, then financing. Maybe, if the dealerships didn't offer 0%, they would offer lower prices on cars. And maybe if stores didn't take credit cards they would offer lower prices. But once they decide to do it, there's no reason not to take them up on it. But they probably wouldn't raise the rates. At 0% APR, they are still making a bet that you will miss a payment and suddenly owe back interest. At interest rates today, not many people have to miss a payment to cover all the others. I'm sorry you don't find the way the world is working right now to be convincing. But I know people who are ready to pull out their checkbook after negotiating, and then are offered 0% APR. So they took it.
nly 5y ago
It's not that simple really. Higher car prices also drag up second hand car market prices. Leasing companies can then sell their used rental cars at a higher price, which means they only have to finance the depreciation...which reduces the cost of leasing a car. It's all swings and roundabouts

fiftyfifty 5y ago

This is because when a bank loans out money in most modern countries they in turn borrow the money from a federal reserve bank which in turn just creates the money to be loaned out. This is how federal reserve banks create more money. The idea being that loans drive the economy through building businesses and infrastructure but it also has the side effect of driving up the cost (inflation) for consumers of everything that can be paid for with loans: houses, cars and higher education and most of those things don't grow the economy in the same way a business loan would.

HPsquared 5y ago
Commercial banks are where money is created. When a commercial bank 'makes' a loan, they do just that: increase the balance in the borrower's account (from the bank's perspective, this is counted as a liability), and the loan contract is also created (this is effectively a bond issued by the borrower, which is an asset now held by the bank). In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money. This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).

iso1631 5y ago

I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc. If I can get that for $200/month for a new car for 3 years then hand it back, with just known costs of insurance and gas, that's valuable. I don't care what the cost of the car is, only what the cash flow is. Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't. Interest rates have been at record lows for over a decade, but the cost of the basket of goods the typical person buys hasn't changed much.

ed_elliott_asc 5y ago
I'm in the UK and I have really noticed in the last few months that life is getting more expensive - eating out is 10-20% more, groceries are up 10-20%. Now this is partly brexit, partly covid, partly we stopped doing anything for months - I can see people getting a bit of a shock when they realise that everything has gone up (the RPI in the UK is the average cost of a set of items in a basket and this confirms it, massive drop last year and now higher than the trend line shows it should have been: https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j5c4/drsi https://www.ons.gov.uk/businessindustryandtrade/retailindust...) - will be interesting to see if this drops down again next year
- iso1631 5y ago
  Our grocery bill is actually down over 18 months, and we rarely eat out but I comments how surprisingly cheap it was yesterday. RPI is not used by anyone as a serious measure of inflation, CPIH is the standard used and it's been really low for donkey's years
deleted 5y ago
[deleted]
reducesuffering 5y ago
> I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc. No need to waste money on a lease. Just buy a used Toyota at effectively 30-50% the cost of that lease you're getting.

georgeecollins 5y ago

Buying a car with a loan or a lease is wealth destroying. I don't care whether most people do it or not. If you are smart enough to be reading Hacker News you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used. Buy a beater if you have to. No wealthy or financially savvy person is impressed because you leased a nice car.

HWR_14 5y ago
> you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used. This is nonsense. If you can borrow money for less than you can earn, you should borrow. I know people who, buying a new car, had saved cash to do so. But they got 0% financing. So even sticking that money in a CD made them more cash. What you mean to say is "if you do not realize that you are paying a lot of money for the use of a new car, not for an asset"
- georgeecollins 5y ago
  >> If you can borrow money for less than you can earn, you should borrow. You are right, but using a car loan to do this makes no sense. You can always get a lower interest rate loan against real estate or margin loans against stocks. Show me any real world lender that won't loan you money at cheaper rates against those assets than they will against a car. Sure, people get 0% loans on cars, but if you think they that doesn't mean they paid more for the car than they could have with cash up front.. well I can't help you. You are trying to make an economic argument and I don't find it very convincing. But in the real world every time have I seen this happen it is to rationalize overspending.
  - HWR_14 5y ago
    > if you think they that doesn't mean they paid more for the car than they could have with cash up front. They certainly don't pay more for the car than they do if they paid with cash up front. The price of the car is negotiated, then financing. Maybe, if the dealerships didn't offer 0%, they would offer lower prices on cars. And maybe if stores didn't take credit cards they would offer lower prices. But once they decide to do it, there's no reason not to take them up on it. But they probably wouldn't raise the rates. At 0% APR, they are still making a bet that you will miss a payment and suddenly owe back interest. At interest rates today, not many people have to miss a payment to cover all the others. I'm sorry you don't find the way the world is working right now to be convincing. But I know people who are ready to pull out their checkbook after negotiating, and then are offered 0% APR. So they took it.

nly 5y ago

It's not that simple really. Higher car prices also drag up second hand car market prices. Leasing companies can then sell their used rental cars at a higher price, which means they only have to finance the depreciation...which reduces the cost of leasing a car. It's all swings and roundabouts