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Imagine: An Economy With No Debt


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2008 Dec 3, 1:09am   20,457 views  168 comments

by Patrick   ➕follow (55)   💰tip   ignore  

imagine

To buy anything with debt is to double its cost.

What if we all just rented until we could pay cash?

What if we saved until we could pay cash for a car?

What if the government paid expenses only from the current year's tax revenue?

What if we did not use credit at all?

I think the world would be a much better place.

Patrick

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1   prometeo   2008 Dec 3, 2:36am  

That's what I am doing. And I ma rich. Not because I have a lot, but because I have enough.

Unluckily... if the gvt doesn't do it too... we are all into debts anyway.

Public debt has taken off all of us the freedom to decide wether to be in debts or not. We all are.

2   Duke   2008 Dec 3, 2:40am  

1. Doubling cost by using debt: this assumes models about charge-offs.
2. Assuming you mean a house: since most Americnas move every 7 years, this would mean little home ownership. This would probably be pretty smart as long as we could make the rental market competitve. With prop 13 it is defintely NOT competetive.
3. Cash for car would push pirces down and, in theory, quality and safety.
4. This would massively limit the ability of the governement to act as a counterwait to private droubts of spending and investment. Maybe not such a bad thing?
5. No credit would have the effect of greatly limiting business as well as mostly insuring business is only carried out by those that ALREADY have money. I think we can look at India as the no-credit model. No good.

Credit is not at all evil - it is only evil in its abuse. Remove credit and you will cut world GDP by at least 50% and probably more like 75%.

3   HeadSet   2008 Dec 3, 3:17am  

I presume you mean no more credit for consumer purchases.

Business would still need to borrow for plant and equipment, with the idea that profit will exceed debt service.

Some cities actually do only spend what they collected in the previous year's tax reciepts.

I also have the luxury of no house or car payments, nor any other debt. My Discover card is a convenience that I pay in full every month, plus I get a 1% cash back on purchases. My future earnings are mine, not to be absorbed to pay interest on depreciating items or goods long gone.

4   HeadSet   2008 Dec 3, 3:49am  

Cash for car would push pirces down and, in theory, quality and safety.

If one can afford car payments than one can afford to save. Even more so since one would be collecting rather than paying interest.

Example: Instead of buying a new car right out of school, make do with a cheap car you have the cash for. Put the "car payment" money in the bank each month for the next 4 years. Within four years, use that saved up money to pay cash for a new car. Repeat.

Quality and safety would not suffer if people saved up to buy cars. You may see a little less wannabe brands, but cars would still have crash testing, seat belts, and air bags.

5   OO   2008 Dec 3, 5:08am  

http://online.wsj.com/article/SB122833771718976731.html

That will be my refi time, 4.5% target, why don't they bring it down to 3%? I am all for bailout like this, especially if they raw print to achieve this.

6   Lost Cause   2008 Dec 3, 5:41am  

Much of what is produced is useless junk. Most of what we buy is sold as reflex to millions of marketing dollars. You are asking for massive unemployment if people cannot spend their credit limits on this junk. Are iPods really necessary for life?

On the other hand, properly used leverage in the form of credit can maximize the return on a business. I don't see credit going away because of these two reasons.

7   Lost Cause   2008 Dec 3, 5:46am  

Just forget buying a car completely -- buy a bus pass. You are already paying taxes for public transportation. A car is the most expensive thing you can buy, after a house. Just imagine the happiness of not having a car payment, insurance, gasoline and repairs.

8   secretlyironic   2008 Dec 3, 5:54am  

Credit is a tool like any other. Misused it can cause great damage. Used properly it can create success.

Imagine someone who is 18 and uneducated and has no money. Should they skip college until they have the full cost of tuition available up front?

Imagine someone who has a steady job, but no way to get to it. (And they aren't in a city with public transit). Should they buy a car on credit so they can get to work?

How about farmers who need to buy fertilizer before they can grow their crops, and need to grow them before they can harvest them, and need to pay laborers for the harvest, all before they can sell the crops and get money to pay for the labor and fertilizer?

9   frank649   2008 Dec 3, 8:35am  

Borrowing goes hand-in-hand with saving. If we limit borrowing to the pool of real savings, we eliminate situations such as one we are in now.

10   thenuttyneutron   2008 Dec 3, 9:23am  

I had a crazy thought about the costs of these bailouts today. I think they should put the cost of the bailout in a graphical format on a log scale. This way when I read it and have to think about it for a second, I will be in a temporary state of bliss before the reality of how fucked we are hits.

11   Brand165   2008 Dec 3, 9:31am  

Sure, we could live without debt. But then we'd have to massively reduce consumption! Oh noes!

:o

On the note of massively reducing consumption, I recommend that everybody read this awesome case study. This guy is a fairly well known local citizen and total greenie. He's built the first zero net electricity house in town, primarily by working on the consumption side first. I was amazed at the energy consumed by some very inconspicuous electronics (his #1 hog was the DVR/cable box!), but it just underscores the importance of consuming less before we complain about commodity and energy prices when they increase.

12   Eliza   2008 Dec 3, 10:20am  

I don't personally think that debt is evil.

Using it all the time, though, is not good.

We have been almost debt free, except for a 1.9% car loan, for the last year. And it is a different mindset, for sure. Do I want to buy junk using real money? No, no, I do not. Purchases are considered more carefully. But it goes beyond that--boundaries are clearer across the board, and it seems easier to make and follow through on goals. This leads me to think that perhaps depending on a rotating and ever-changing pool of debt favors faulty thinking.

13   Brand165   2008 Dec 3, 10:51am  

Well. Holy shit.

I am just speechless. Utterly fucking speechless. The government is going to use the defunct GSEs to push out a 4.5% interest rate to prevent house price declines. The banks will be encouraged to lend cheaply by the government purchasing their securities through Fannie and Freddie.

So pretty much our plan to solve the bubble is to reinflate the bubble. AGAIN! And this time, the taxpayers will take all the risks with shitty mortgages instead of the banks. No more implicit guarantee here, folks! If capitalism can't fix it, then by God, Big Brother can!

Buy now, Bay Area folks, because Uncle Sam might actually have the sheer power to price you out forever!

14   Paul189   2008 Dec 3, 11:10am  

My grandparents on my fathers side (children of the great depression) ALWAYS paid cash for everything: Houses, cars, trips etc.. Before my grandfather passed he told me how he was at the University of Chicago in the late 30's completing his masters. He did not continue to his PHD (even though accepted) as the tuition was $135 per semester and he did not want to take a loan for that. In retrospect a little debt may not have been a bad thing but he did quite well for himself anyway.

15   Brand165   2008 Dec 3, 11:35am  

I see nothing wrong with debt as a means of procuring productive assets. Eventually those will help the owner to pay off the debt in an accelerating fashion.

Using debt as a gateway to consumption, especially beyond what can be quickly repaid, is simply digging a hole that gets deeper even as you're filling it back in.

16   PermaRenter   2008 Dec 3, 11:35am  

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17   PermaRenter   2008 Dec 3, 11:49am  

Deflation: Bargains abound, this could be a problem
Everything is on sale. And that's not a good thing.

Consumer prices in October fell at the fastest pace in more than 60 years, sucked down by the rapidly deteriorating economy. The prices of oil, food, cars, clothing and electronics have all plunged. Home prices continue to swoon and so do stock prices.

As the early reports from the holiday shopping season suggest, the nationwide fire sale might seem like a boon for consumers. But it's increasing the risk that the economy could become mired in a dangerous deflationary spiral — a widespread, sustained reduction in prices. That's something that hasn't happened here since the Great Depression.

Economists say it's too early to tell whether deflation has set in — and many say the government's aggressive responses to the credit crunch likely will prevent sustained deflation.
...
A deflationary spiral can have several causes, such as a widespread glut of goods that forces manufacturers to slash prices. In the current crisis, the bursting of the housing bubble has forced home prices down, pulling down the prices of raw materials, cars and even stocks.

As prices fall, consumers eventually stop spending, either because they are worried about their jobs, or because they figure they can get lower prices later. Companies start laying off workers because lower prices have pushed down — or eliminated — their profits. That, in turn, means even less demand.

18   PermaRenter   2008 Dec 3, 11:53am  

Nonsense about Deflation

We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead item in the financial news section heralds "The Looming Threat of Deflation." This headline encapsulates two highly problematic ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near term.
...
You can see clearly that the rate of economic growth and the rate of price-level change have been independent, at least within the ranges of these variables in US economic history. (Hyperinflation or hyperdeflation would be another matter: either would be devastating by making economic calculation and long-term contracting virtually impossible.)

Any decent economics teacher makes sure that before the students have gone more than a week or two, they have mastered the difference between absolute (nominal) and relative (real) prices. All of economic analysis hinges on this understanding. Yet practicing politicians, investment gurus, news media hyperventilators, and others who play important roles in influencing public opinion are completely lacking in this basic understanding. The upshot is a destructive bias in favor of secular inflation, with the risk of periodic bouts of rapid inflation.

Which brings us to the second question: for better or worse, does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain. So far, the huge spurt in base money has simply been absorbed and held by the banks in the form of (legally) excess reserves, but the likelihood that the banks will sit on $268 billion of excess reserves forever is nil. Once they feel more secure, their loans and investments will go forth in search of a higher yield than the Fed pays them (since a recent change in policy) on their reserves, and at that point the banking system's money multiplier will kick in with terrific force.

In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to what the investment "experts," the politicians, and the mainstream economists believe, inflation is not a benign element in the economy's operation. It is, as it has always been, the most dangerous and destructive form of taxation.

19   MCM   2008 Dec 3, 12:14pm  

Well. Holy shit.

I am just speechless. Utterly fucking speechless. The government is going to use the defunct GSEs to push out a 4.5% interest rate to prevent house price declines. The banks will be encouraged to lend cheaply by the government purchasing their securities through Fannie and Freddie.

Brand, my sentiments exactly. Just when I am comfortable in thinking the assclowns have shot their collective wad, and there are no more bullets, they pull this crap.

Utter nonsense!

I guess I am an idiot, because I refuse to join the Joe-howmucha-month club, and not worry about total debt, even if there is no way I can possibly pay it off in my lifetime.

After all, that is exactly what the government is now doing.

F*ck me! I give up. I can't continue to play the rat race game when the rules are so slanted towards just farming the middle class sheeple to continue feeding the machine.

I'll be going over the fence real soon, folks.

20   coretexity   2008 Dec 3, 12:24pm  

I've a question for the board. I got 2 letters in the mail - 1 from Wamu and 1 from Chase, saying that they've closed my credit card accounts with them as I had not used their credit cards in years. I've pretty much had it with JPM - at least Citi was kind enough to give me a 15 day notice. Anyway, do you guys think this will ding my FICO? I have never paid a dime in interest, I pay off all my credit cards (I use 2 - Costco Amex and DCU Visa) every month and last I checked had a 820 FICO. But I am worried that this 10-20k hit on the open credit is going to put my FICO in the subprime range.

21   MCM   2008 Dec 3, 12:46pm  

Generally speaking, Fair Isaac uses a few bits of information:

FICO Credit Score Components:
35% Payment History
30% Amounts Owed
15% Length of Credit
10% New Credit
10% Type of Credit

Even though accounts are closed, history is still there,
Amounts owed, length of credit, new credit, and type of credit will not change much.

My opinion is that is will not affect it too much.

But then again, Fair Issac has some secrets that they don't share much.

Also, anything over 730 is excellent, and this will not drop you below that, so don't worry, soon you too can get 4.5% 30 yr mortgage at 3.5 times your annual income!

22   Brand165   2008 Dec 3, 12:53pm  

@MCM: It's basically all just direct market manipulation to avoid the correct pricing of risk. The lenders don't want to make more bad loans, so there's a high premium on mortgages. But if it's guaranteed money, then why not? They can go back to being just a mindless clearinghouse for anyone with a pulse. Government has stepped in to take over for Wall Street, knowing full well that Wall Street's bellyache was caused precisely by this same insanity.

23   coretexity   2008 Dec 3, 1:13pm  

Thanks, MCM. I think I'll be priced out again. I've been renting for 11 years and extended the lease on my apartment till Feb 2010. I am glad I did, coz the govt will do everything to keep the housing market propped up. I am okay with apartment life, I just regret not giving my 5 year old a backyard to play in.

24   coretexity   2008 Dec 3, 1:15pm  

Just when I am comfortable in thinking the assclowns have shot their collective wad, and there are no more bullets, they pull this crap.

I never understimated their creativity. Even if they end up buying and selling homes as a housing clearing house (?), I'd not be surprised.

25   OO   2008 Dec 3, 1:44pm  

wait till the Fed and Treasury are completely desperate and roll out their weapon of mass destruction - raw print in large scale, and in public. That will do wonders to the USD.

26   OO   2008 Dec 3, 1:51pm  

Calling for $1T stimulus, hooray
http://www.bloomberg.com/apps/news?pid=20601087&sid=afWnxP9Dzv0M&refer=home

The government cannot stop the depression, but they sure can trash the USD :-)

27   Unalloyed   2008 Dec 3, 2:23pm  

Early into his first term, when President Obama delcares a national bank holiday, people will be locked out of their accounts. I've been wondering how payroll will proceed when payment by direct deposit is used on such a large scale. And how will the Treasury pay maturing securities if not by electronic deposit? Perhaps checking accounts (no transfers allowed) will be the exception. Can't quite imagine how a modern bank holiday will be carried out in practical terms.

28   Lost Cause   2008 Dec 3, 2:50pm  

I don't see tremendous bargains in the stores. Real estate is still not worth it. For such a dire financial situation, people are not giving anything away -- there seem to be people being screwed out of things, though.

I don't see how the latest Treasury noises are anything more than bluster. As far as I can tell, there is nobody in particular that will gain by this. They dangle this kind of crumb to help sate some part of the masses, but it usually contains so many restriction that it won't do any good. They will never build a consensus for something like this. The payoff is too nebulous. I have seen how every one of the bailouts have functioned thus far, and I do not see a bagman in this.

29   justme   2008 Dec 3, 4:30pm  

TOB,

Jack Welch? Blech, Ech, whatever Bill-the-Cat said.

30   justme   2008 Dec 3, 5:44pm  

Speaking over over-rated CEOs:

Isn't it precious how the Ford CEO is now saying that they "probably will not need the money" (interview on PBS today), and pretending that they are taking the loan guarantee mostly as an act of expressing solidarity with GM and Chrysler.

Where did I hear this kind of BS before? Oh, yeah, that's right: 4 and 2 months ago when Citibank and Wells Fargo would (1) take loans from the Fed discount window and (2) sell preferred stock to USG, NOT because they needed the money,
no siree, but to help remove the stigma for their poor cousins that were really desperate for cash.

Mind you, I'm not against the automaker bailout. I'm just against the lies, hypocrisy and posturing.

would sell preferred stock to USG in order to take the2

31   justme   2008 Dec 3, 5:44pm  

..Speaking OF over-rated CEOs....

32   justme   2008 Dec 3, 5:48pm  

PermaRenter,

I think much of the saber-rattling against deflation is just political theater designed to frighten and soften up the public opinion before USG, UST and FedR start their campaign to inflate us out of dropping housing prices.

Nasty business, it is.

33   Zephyr   2008 Dec 3, 10:22pm  

Commercial lending, borrowing and investing enables the movement of financial resources to the most productive ventures. Deflation disrupts this process. It also crushes those enterprises with debt. Employment falls.

Deflation exacerbates the damage of a recession. Inflation exacerbates the damage of a boom/bubble. What the Fed should do is inflate during recessions and tighten during booms. Unfortunately they are slow to move and end up exacerbating the boom by inflating well into the boom. Then they tighten too much and precipitate a more severe decline.

Our current financial crisis would not have occurred if Greenspan had not cranked up the easy credit machine (late 2001 - 2004). Then, by rapidly tightening thereafter the Fed precipitated the credit crunch.

We are suffering from bad Fed policy.

34   Zephyr   2008 Dec 3, 10:27pm  

Some deflation is likely as we come down from our credit high.

However, with the wasteful bailout spending, massive stimulus and excessively low Fed funds rate (again) you can be sure that inflation will return with a vengeance.

35   FormerAptBroker   2008 Dec 3, 11:35pm  

secretlyironic Says:
> Credit is a tool like any other. Misused it can cause
> great damage. Used properly it can create success.

It is unfortunate that most people misuse the tool we call credit.

> Imagine someone who is 18 and uneducated and has
> no money. Should they skip college until they have the
> full cost of tuition available up front?

If someone makes it to 18 with “no money” and has not thought about he or she is going to pay for college they are not mature enough to go to college and should take a year off and save up to pay for college. I got a great education at a public university and easily paid for my entire education with a part time job.

> Imagine someone who has a steady job, but no way to get to it.
> (And they aren’t in a city with public transit). Should they buy a
> car on credit so they can get to work?

Buying a car (that you are not using in a business to make money) with credit is almost always a bad idea. It is a better idea to move closer to the steady job so you can walk to work while you save for a car.

> How about farmers who need to buy fertilizer before they can
> grow their crops, and need to grow them before they can harvest
> them, and need to pay laborers for the harvest, all before they
> can sell the crops and get money to pay for the labor and fertilizer?

Basically people should use credit only when they think that by borrowing money they will get a bigger return than not borrowing money say buying a home or paying a crop duster to fly over your crops with pesticides to increase your crop yield. Using credit to buy a big screen TV or pay a crop duster to give you a ride in a plane for fun is a bad idea (but the way most people use credit)…

36   FormerAptBroker   2008 Dec 3, 11:51pm  

coretexity Says:

> I’ve a question for the board. I got 2 letters in
> the mail - 1 from Wamu and 1 from Chase,
> saying that they’ve closed my credit card accounts
> with them as I had not used their credit cards
> in years. I am worried that this 10-20k hit on
> the open credit is going to put my FICO in the
> subprime range.

I've been over 800 for years and my score actually went up when I had a couple cards closed for non use (a math guy I know who works at Fair Isaac/myfico.com told me that it was because a lot of available credit actually lowers your score). I saw my score drop a little when I increased my limit from $30K to $50K on my most used card (I was buying a lot of stuff for an apartment renovation and actually spent close to $30K in one month)...

37   SP   2008 Dec 3, 11:54pm  

Brand says:
Buy now, Bay Area folks, because Uncle Sam might actually have the sheer power to price you out forever!

Uncle Sam is a dirty old perverted pedophile - he finds new ways to fuck the next generation.

I wouldn't panic much about the new treasury plan though. It is not sustainable - it is just a way to make the fire slow down until the current bunch of thieves can exit the building.

38   Brand165   2008 Dec 4, 2:53am  

Well, there was significant irony intended in my quip. :)

Almost all of this stuff is unsustainable. The primary problem isn't that home prices are falling, it's that a bubble existed to begin with. Congress should be deeply concerned about the fragility of an economy that cannot withstand a contraction. If we keep propping it up with emergency measures, and ignoring the fundamental problems, then our economic backbone will continue to deteriorate.

In other words, we cannot sustain a tulip-based regime by government intervention to prop up tulip prices. At some point ya gotta call a tulip a tulip and get on with the show.

39   Malcolm   2008 Dec 4, 3:24am  

I think government spending in areas that have been deprived like science, infrastructure, and redevelopment will lessen the contraction and add real value.

40   HeadSet   2008 Dec 4, 3:34am  

Apparently the gov wants to drive mortgage rates to 4.5% while eliminating or reducing fees. I wonder if that will include down payment assistance?

What an opportunity! If you are a saver with a paid for house, don't just resent the extract-and-walk folks, get your share! Just get a mortgage now while the house price is temporarily propped up by the 4.5% low fee mortgage. Get max appraisals too, since the gov will buy the debt directly from the bank (no Wall St securitization step). Now move to rental, stop payment on the mortgage, then wait and cash buy a house for much less after the market declines resume.

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