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"When you lend money from a bank, you will not spend it on fancy restaurant visits. Because you know you will have to pay it back." This doesn't reflect consum

by tmn 3y ago

"When you lend money from a bank, you will not spend it on fancy restaurant visits. Because you know you will have to pay it back." This doesn't reflect consumer behavior. Just consider a simple example ignoring future income. Say I have 520k. I buy a 500k house. Scenario 1. I buy it with cash and I have 20k left. Scenario 2. I buy it with a mortgage (20% down), and how have 420k left. It's easy to see why those in scenario 2 would continue to fund lifestyle choices like eating out. The reality that they need to pay back that debt gets moved to the future. The future also provides additional income. So the need to pay it back gets delayed, meaning money available now is freed up for lifestyle choices.

s1artibartfast 3y ago
I think it is hard to get much insight from these "just so" stories because so much is dependent on the circumstances and counterfactual. I think is reasonable to think that low interest rates pulls consumer spending from the future into the present, when compared to higher interest on lending. High inflation also spurs consumer spending because the return on savings is less. back to housing, My experience is that personal spending is waaay down after buying a house, because I now need to service 1.2M of debt every year, which is about 80k.
- tmn 3y ago
  Agree with your first 3 points. I would also say though that your experience with housing is not unexpected, but this does not contradict the point I'm trying to make. The comparison would be the situation where you bought that house with cash. If you could even do so, I think it's safe to assume your spend would be even less. The point is, that creation of debt does not immediately net cancel out to a no-op in terms of consideration for monetary inflation. This is all in response to the comment several steps up "Banks lending is an increase in the money supply" and the commenter who presumably disagreed with that by saying that one will not spend that money in the economy because they have to pay it back.
satellite2 3y ago
Even though you are right, this is a very poor example. If the person that lent you the 400k don't have them at their disposal then the total amount of money at the disposal of someone in the economy didn't change after your transaction. You are right because banks can create money.
- tmn 3y ago
  Fair distinction. But even in the hard money lending case, the implication is that money is being freed up to circulate. More velocity leads to more inflation

by tmn 3y ago

s1artibartfast 3y ago

I think it is hard to get much insight from these "just so" stories because so much is dependent on the circumstances and counterfactual. I think is reasonable to think that low interest rates pulls consumer spending from the future into the present, when compared to higher interest on lending. High inflation also spurs consumer spending because the return on savings is less. back to housing, My experience is that personal spending is waaay down after buying a house, because I now need to service 1.2M of debt every year, which is about 80k.

tmn 3y ago
Agree with your first 3 points. I would also say though that your experience with housing is not unexpected, but this does not contradict the point I'm trying to make. The comparison would be the situation where you bought that house with cash. If you could even do so, I think it's safe to assume your spend would be even less. The point is, that creation of debt does not immediately net cancel out to a no-op in terms of consideration for monetary inflation. This is all in response to the comment several steps up "Banks lending is an increase in the money supply" and the commenter who presumably disagreed with that by saying that one will not spend that money in the economy because they have to pay it back.

satellite2 3y ago

Even though you are right, this is a very poor example. If the person that lent you the 400k don't have them at their disposal then the total amount of money at the disposal of someone in the economy didn't change after your transaction. You are right because banks can create money.

tmn 3y ago
Fair distinction. But even in the hard money lending case, the implication is that money is being freed up to circulate. More velocity leads to more inflation