Debt

[Ursa Majoris]

i don't think that's really true. yeah, that phenonenon is something that drives consumer spending (which is one component of the overall economy). and yeah, the hugh drop in consumer spending if everyone collectively and simultaneously decided to stop using financing for any and all purchases would hurt overall economic growth in the short term. but as long as it's fluid, individual choices about whether to spend with debt or save and not spend don't have a huge effect on the overall economy, they're just shifting money around WITHIN the overall economy.

 

So in other words, one person's decision to save provides the money for another person's decision to finance something? I can see that but what if the overall level of savings goes negative, as it is now?

[Azazello1313]

Not necessarily. The self-proffessed "fiscal conservatives" think we can "grow our way out" of the problem by cutting taxes, which stimulates grow, with increases income, which then helps cover our collective balloning debt load. And while cutting CERTAIN taxes *can* stimulate growth, it doesn't always, and more importantly it usually doesn't in the short-term. But even when growth is stimulated, that equation only works when your debt level remains relatively constant. What should be abundantly clear to everyone is that when today's average American makes more money, he or she tends to spend it. Not save it. Not pay down debt. The "grow our way out of it" solution works in theory, but is fataly flawed in practice.

 

 

this doesn't make sense, i can't really even figure out what you're arguing. a lot can and has been said about the relation of tax cuts to economic growth, but none of this has much relation at all to the phenomenon of credit-spending in the US.

[Azazello1313]

So in other words, one person's decision to save provides the money for another person's decision to finance something? I can see that but what if the overall level of savings goes negative, as it is now?

 

 

it's only really a problem for the overall economy if tons of people suddenly stop PAYING their debts. i.e., if, in suddenly swelling numbers, they declare bankruptcy, default on their home loans, etc. you see some hint of that worry with the whole sub-prime mortgage stuff that's going on now.

[Ursa Majoris]

it's only really a problem for the overall economy if tons of people suddenly stop PAYING their debts. i.e., if, in suddenly swelling numbers, they declare bankruptcy, default on their home loans, etc. you see some hint of that worry with the whole sub-prime mortgage stuff that's going on now.

 

OK, I see that too. Thankfully, I'm not going to be amongst the deadbeats.

[yo mama]

i don't think that's really true. yeah, that phenonenon is something that drives consumer spending (which is one component of the overall economy). and yeah, the hugh drop in consumer spending if everyone collectively and simultaneously decided to stop using financing for any and all purchases would hurt overall economic growth in the short term. but as long as it's fluid, individual choices about whether to spend with debt or save and not spend don't have a huge effect on the overall economy, they're just shifting money around WITHIN the overall economy.

Your wrong for the simple fact that if people save instead of spend in the short term, then business doesn't make money in the short term. When businesses don't make money, they fire people and/or spend less. When people are out of work they neither spend nor save.

 

And it's not just debt-financing that has been fueling consumer spending, which is probably the single largest factor of our overall macro economic health. Back in the 90s the dot com boom had people spending, but most of that money has settled down. The next wave of heavy consumer spending was fueled by people spending the equity and rapid appreciation in their homes. But that source of spending is really cooling off. What is left, however, is credit.

 

While I do agree that money is merely being shifted within the same economy, those who pay off debt, or save, are effectively taking that money out of circulation and parking it. Money needs to continue to circulate within that economy to fuel SPENDING. While savings/debt reduction does bring long-term stability (which is good), our economy is largely driven by short-term, quarterly profit reports. Although it will never happen, I think you grossly underestimate the impact it would have on our economy if people stopped spending on credit. And I can't even imagine what would happen if we applied that principle to the federal government.

Edited March 29, 2007 by yo mama

[wiegie]

those who pay off debt, or save, are effectively taking that money out of circulation and parking it.

no they aren't--their money will be used by other people (read: businesses) to buy investment goods

Edited March 29, 2007 by wiegie

[Azazello1313]

Your wrong for the simple fact that if people save instead of spend in the short term, then business doesn't make money in the short term.

 

if everyone did it at once, sure. that's what i said.

 

And it's not just debt-financing that has been fueling consumer spending, which is probably the single largest factor of our overall macro economic health. Back in the 90s the dot com boom had people spending, but most of that money has settled down. The next wave of heavy consumer spending was fueled by people spending the equity and rapid appreciation in their homes. But that source of spending is really cooling off. What is left, however, is credit.

 

credit has been around and been used heavily for a long time. and really, pulling money out of home equity represents the exact same sort of negative savings phenomenon you're griping about with other expanding debt.

 

While I do agree that money is merely being shifted within the same economy, those who pay off debt, or save, are effectively taking that money out of circulation and parking it. Money needs to continue to circulate within that economy to fuel SPENDING.

 

this is dead wrong on a lot of levels. unless they're parking it under their mattress, people who save are probably keeping it in a bank. what do you think banks do with the money? they SPEND it, or invest it, or loan it out to other people to spend. that money is very much IN circulation.

[Coffeeman]

The rest of the country which is wallowing in debt and can't figure out how to get out from under it, would do very well by implementing Ramsey's plan.

 

 

Good info. Here are some more amazing (read: depressing) facts about the '2 Americas':

 

* 50% of us don't have an investment portfolio at all

 

* Only 21% of us have direct investments (excl. mutual funds) in listed stocks; among those who do, the average portfolio is a mere $15,000

 

* Of the wealthiest 10% of families, only 50% of them (=5% of all) have equity portfolios > $100K

 

* So how about mutual funds? Only 15% of have them directly (outside of 401(k)s or IRAs), and the median holding is $40K

 

* 50% of us have indirect investments via 401(k)s and IRAs, but the median value is only $35K

 

* 50% of all familes have TOTAL assets (investments, houses, cars, furniture, etc) of less than $23K

 

* How about the lucky ones who actually own their homes? Their median net worth (all assets minus liabilities) is $184K

 

Sobering, isn't it? And maybe lends some insight into the so-called 'red' or 'blue' states when we talk politics. Throughout history, the poor have been the more conservative, uneducated, 'God-fearing' people who fear change. They and don't realize how the status quo will always keep them in a cycle of debt, widening the gap between the haves and have-nots. Mazlow's Hierarchy of Needs pyramid in full effect...

 

If they have their $20K car (on a 5, 6 or 7-yr pay plan) and some cash to blow on Saturday night, they think everything is fine, and therefore needs to stay on an even keel. So they vote down major initiatives that could help them and all of us to improve our lot...

[tonorator]

If they have their $20K car (on a 5, 6 or 7-yr pay plan) and some cash to blow on Saturday night, they think everything is fine ...

 

are you saying there is more out there? what is ... out there?

[Azazello1313]

Throughout history, the poor have been the more conservative, uneducated, 'God-fearing' people who fear change. They and don't realize how the status quo will always keep them in a cycle of debt, widening the gap between the haves and have-nots.

 

oh my

[Puddy]

Let's try and keep this thread out of DMD's crosshairs

Edited March 29, 2007 by Puddy

[yo mama]

no they aren't--their money will be used by other people (read: businesses) to buy investment goods

 

Are you trying to tell me that the macro economic impact of me taking $100 and paying down credit card debt or investing in a 401K is the same as if I take that $100 and buy a VCR or some other consumer good? If so, I'd be really interested in your substantiating that claim.

[Azazello1313]

 

VOTE BY INCOME  		   BUSH   KERRY  NADER Under $15,000 (8%) 36%  63% 0% $15-30,000 (15%) 42%   57% 0% $30-50,000 (22%) 49%   50% 0% $50-75,000 (23%) 56%   43% 0% $75-100,000 (14%) 55%   45% 0% $100-150,000 (11%) 57%   42% 1% $150-200,000 (4%) 58%   42% * $200,000 or More (3%) 63%   35% 

 

 

yeah those poor, dumb red-staters

Edited March 29, 2007 by Azazello1313

[wiegie]

Are you trying to tell me that the macro economic impact of me taking $100 and paying down credit card debt or investing in a 401K is the same as if I take that $100 and buy a VCR or some other consumer good? If so, I'd be really interested in your substantiating that claim.

 

No--I am telling you (as I posted earlier in the thread) that pulling money out of spending and putting it into saving might cause a short-run economic downturn, but will likely result in higher economic growth in the long-run.

 

(This is a fairly standard economic principle.)

[Coffeeman]

Let's try and keep this thread out of DMD's crosshairs

 

 

Good point - let me attempt (too late?) to clarify. First of all, I'm a moderate Rep on the good side of these stats, so I guess you could call me a 'red'. I don't just vote the party line if I know anything about the person or issues - I've voted for plenty of Dems. (But when I don't have much data, I'll let the Rep party have the benefit of the doubt, as I presume most people would do for their party.)

 

I should've been politically neutral and said that both parties are somewhat bi-polar, in that a wide range of socio-economic groups are represented in both. But the extremists of both parties tend to be in the poorer range. More wealthy people tend to be better educated and more tolerant of opposing viewpoints, therefore being the 'moderates' in both parties.

 

If you look at a map of the red vs. blue votes in CA for both the last 2 big elections (00 and 04), you'd see that almost all the blue was in the urban areas and the red was in the more sparsely populated areas. Overall, the blue won in CA due to population density in urban centers, but if each county got only one equally weighted vote, county by county it was a red landslide looking at the land mass.

 

The blue would be both the poorer, union-driven part and the wealthy, Hollywood stereotypes. The red could be both poor folks living by the edge of their teeth plus the wealthy 'landed gentry' stereotype. And, of course, there are plenty of middle income folks on both sides of the aisle. The last 2 big elections drove home how not only are the two 'colors' deeply divided, but also within each party you have some deep divides. The middle is getting pushed more towards one end or the other economically - like in business, you are always either gaining ground or losing it, whether you pay attention or not.

 

Like Yoda says, fear is a very negative emotion that leads you down a bad path. If you are already living on or near the (financial) edge, you fear - and will fight fiercely - any group or law that could threaten what little grip you have. The poor have more fear, and therefore gravitate towards the ends, or extremes, of both parties. Its a fact, but who am I to judge whether or not that fear is justified? (I can't - I would likely be in the same position/mindset, if heading towards the 'lower middle'.)

 

Look at our media. If you wonder why certain Tv shows, movies, or songs - and their attendant personalities - are popular when they seeming lack any redeeming value, think about the 2 Americas. Is the gap getting wider or narrower, and on which side do you see yourself?

 

If its the wrong end, it must be someone else's fault, right? So you have to go fight the political battle to win the fight, instead of looking in the mirror and changing yourself. Its much easier that way...

 

So I guess its not really politics I'm talking, its economics. But the two are tied together. As someone famously said, "Its the economy, stupid!" Leading to us having a (originally) poor man in the Oval office for 8 glorious years in the 90's...

Edited March 29, 2007 by Coffeeman

[yo mama]

No--I am telling you (as I posted earlier in the thread) that pulling money out of spending and putting it into saving might cause a short-run economic downturn, but will likely result in higher economic growth in the long-run.

 

(This is a fairly standard economic principle.)

 

Thank you. That was my whole point: consumer spending has it's greatest impact on short-term economics. Repayment of debt and capital investments have their greatest impact on long-term economics. So my buying a VCR versus paying off a credit card does not have the same economic effect.

 

More debt-financed purchases equal better short-term economic growth, and thus better quarterly profits. The opposite is also true. Over the last 10 years or so we, as a nation, have more than doubled our debt-financed purchases. When people talk about our Nation's "economic growth" over the last decade, much of that is attributable to the increase in debt-financed spending. Because it sure as hell isn't due to any kind of trade surplus. Am I wrong about that?

 

Ursa's original point, to which I was responding, questioned at what point does the American consumer go bust if this trend continues. I merely responded that some people feel that economic growth is the answer. In general, I agree. But if economic growth is conditioned upon an ever-increasing national appitite for debt-financed consumer spending, then we're in trouble.

[wiegie]

When people talk about our Nation's "economic growth" over the last decade, much of that is attributable to the increase in debt-financed spending.

not really

 

Economic growth basically comes from technological innovations, improvements in human capital (i.e. skills), and increases in the capital stock.

 

The fact that we have been concentrating on producing consumer goods for the last decade has very likely slowed economic growth from where it would have been had we focused instead on saving money and using it to produce capital goods.

 

If households would all stop borrowing and start concentrating on saving, it would hurt the economy quite sharply for a short period of time (a couple of years at most), but would result in higher economic growth soon enough. (It would probably not be overly dissimilar to the recession in the early 1980s that was caused by Volcker's tightening of the money supply to fight inflation.)

[Azazello1313]

Economic growth basically comes from technological innovations, improvements in human capital (i.e. skills), increases in the capital stock, and Bush's tax cuts.

 

fixed.

 

 

 

 

[tonorator]

Good point - let me attempt to clarify.

 

it didn't work ...

[Azazello1313]

If you look at a map of the red vs. blue votes in CA for both the last 2 big elections (00 and 04), you'd see that almost all the blue was in the urban areas and the red was in the more sparsely populated areas. Overall, the blue won in CA due to population density in urban centers, but if each county got only one equally weighted vote, county by county it was a red landslide looking at the land mass.

 

The blue would be both the poorer, union-driven part and the wealthy, Hollywood stereotypes. The red could be both poor folks living by the edge of their teeth plus the wealthy 'landed gentry' stereotype.

 

it's always a terrible mistake to look at an electoral map and draw economic conclusions like these. because just about every "blue" area is 45% republican and every "red" area is 45% democrat. and every "rich" area has its share of poor people and every "poor" area has its people that make a pretty good living. making broad generalizations based on compounding these weak majorities is an exercise fraught with all sorts of peril.

 

if you want to know how people of various income and savings levels vote, look at polling data focused on those questions. if you want to know how people of a given religious persuasion vote, look at polling data focused on that question. don't try to extrapolate this stuff from pretty colors drawn on a map representing very slight majorities one way or the other, as more often than not, you will draw exactly the WRONG conclusion (as you have here).

[tonorator]

pretty colors

 

i like the pretty colors ...

[Coffeeman]

it didn't work ...

 

 

OK, strip out all the background crap - how about the phrase 'preaching to the choir'? What seems reasonable to the educated group here would be a foreign concept to others, but that is easy to forget when you can't even understand that mindset. Like the issue (or 'problem'?) of debt...

[Coffeeman]

don't try to extrapolate this stuff from pretty colors drawn on a map representing very slight majorities one way or the other, as more often than not, you will draw exactly the WRONG conclusion (as you have here).

 

 

I noticed you cut off my quote right before the part about plenty of middle income folks populating both parties. But that is your perogative as an editor....

[yo mama]

not really

 

Economic growth basically comes from technological innovations, improvements in human capital (i.e. skills), and increases in the capital stock.

 

I respectfully disagree. Every article that I've found discussing actual economic growth over the last 10 years has attributed consumer spending as the foremost catalyst, with tax cuts (which indirectly contribute to spending) as a the second most driving factor. I agree that capital investments and the such drive long-term growth, but that's more of a (correct) text book answer.

 

If I'm wrong I owe you a beer and an apology. But at this point, you'll have to prove it because right now we're just pissing in circles. I'd actually be happy if you proved me wrong; sort of as a cost of enlightenment, if you will. So if you've got some empircal data addressing economic growth over the last 10 years which shows the primarily factor to be something other than consumer spending or tax cuts, I would actually be very interested in reading that.

 

And I can't tell you how much I appricate this high-level exchange; wish there was more of it in the Tailgate.

[Azazello1313]

I noticed you cut off my quote right before the part about plenty of middle income folks populating both parties. But that is your perogative as an editor....

 

 

i didn't edit anything, i clipped and responded to the assumptions that led you to the incorrect conclusion.