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davelj
Participant[quote=briansd1]I believe that sdreator brought up some good points.
If people were happy to live in simply ulitarian 1500sf houses, they would have more money to spend on other things. Housing be be cheaper also.
But people want to live ornate houses, with community amenities and HOA. But the want to replace their cars and durables more frequently.
Since clothing, electronics, food now represent a smaller portion of income than in the past, then more could go to savings. But in general, we go out to eat more and we get fat and stressed out. People get stressed out keeping up with their peers.
As dave pointed out, the paradox of thrift would result lower economic growth.[/quote]
I basically agree with this. If folks want to live today as they did in the 60s/70s… they can do so VERY inexpensively.
Much smaller house, well-preserved 10-year old car, furniture from craigslist/thrift store/consignment store, box TVs (I think you can find a well-preserved “old” TV these days for $50), no cable TV, no smart phone (basic cell phones cost very little today), clothing from Target or thrift stores, eat out once a month… you get the idea.
The three areas that have really zoomed out of control are health care, college and fuel. There are many ways to reduce college costs for folks that want to do so (which are covered herein). Fuel costs are up, but so is fuel efficiency (although on a net basis in real terms we’re probably behind compared to the 60s). And where health care is concerned… we’re paying for all of those advances of the last 40 years. But I read somewhere that 80% of Americans would be considerably better off with a (relatively inexpensive) catastrophic health care policy, as opposed to the group/managed care policies that they have. (That is, most Americans over-insure themselves where health care is concerned.)
So, the bottom line is that folks who want to live as we did during the Halcyon Days can do so for fairly little money… but they have to be willing to give up some mod cons… which most folks are simply unwilling to do.
To sdr’s earlier point about eating out, my recollection is the same as his. My family probably ate out at a sit-down restaurant once a month (and there were precious few choices). And then we probably had a bucket of chicken or hamburgers plopped down on the table once or twice a month on top of that. Otherwise, dinner was cooked at home. Today this is almost unimaginable. Folks simply eat out (or get carry-out) considerably more than they used to. Some can afford to do so, but clearly most cannot.
Participant[quote=briansd1]I believe that sdreator brought up some good points.
If people were happy to live in simply ulitarian 1500sf houses, they would have more money to spend on other things. Housing be be cheaper also.
But people want to live ornate houses, with community amenities and HOA. But the want to replace their cars and durables more frequently.
Since clothing, electronics, food now represent a smaller portion of income than in the past, then more could go to savings. But in general, we go out to eat more and we get fat and stressed out. People get stressed out keeping up with their peers.
As dave pointed out, the paradox of thrift would result lower economic growth.[/quote]
I basically agree with this. If folks want to live today as they did in the 60s/70s… they can do so VERY inexpensively.
Much smaller house, well-preserved 10-year old car, furniture from craigslist/thrift store/consignment store, box TVs (I think you can find a well-preserved “old” TV these days for $50), no cable TV, no smart phone (basic cell phones cost very little today), clothing from Target or thrift stores, eat out once a month… you get the idea.
The three areas that have really zoomed out of control are health care, college and fuel. There are many ways to reduce college costs for folks that want to do so (which are covered herein). Fuel costs are up, but so is fuel efficiency (although on a net basis in real terms we’re probably behind compared to the 60s). And where health care is concerned… we’re paying for all of those advances of the last 40 years. But I read somewhere that 80% of Americans would be considerably better off with a (relatively inexpensive) catastrophic health care policy, as opposed to the group/managed care policies that they have. (That is, most Americans over-insure themselves where health care is concerned.)
So, the bottom line is that folks who want to live as we did during the Halcyon Days can do so for fairly little money… but they have to be willing to give up some mod cons… which most folks are simply unwilling to do.
To sdr’s earlier point about eating out, my recollection is the same as his. My family probably ate out at a sit-down restaurant once a month (and there were precious few choices). And then we probably had a bucket of chicken or hamburgers plopped down on the table once or twice a month on top of that. Otherwise, dinner was cooked at home. Today this is almost unimaginable. Folks simply eat out (or get carry-out) considerably more than they used to. Some can afford to do so, but clearly most cannot.
Participant[quote=briansd1]I believe that sdreator brought up some good points.
If people were happy to live in simply ulitarian 1500sf houses, they would have more money to spend on other things. Housing be be cheaper also.
But people want to live ornate houses, with community amenities and HOA. But the want to replace their cars and durables more frequently.
Since clothing, electronics, food now represent a smaller portion of income than in the past, then more could go to savings. But in general, we go out to eat more and we get fat and stressed out. People get stressed out keeping up with their peers.
As dave pointed out, the paradox of thrift would result lower economic growth.[/quote]
I basically agree with this. If folks want to live today as they did in the 60s/70s… they can do so VERY inexpensively.
Much smaller house, well-preserved 10-year old car, furniture from craigslist/thrift store/consignment store, box TVs (I think you can find a well-preserved “old” TV these days for $50), no cable TV, no smart phone (basic cell phones cost very little today), clothing from Target or thrift stores, eat out once a month… you get the idea.
The three areas that have really zoomed out of control are health care, college and fuel. There are many ways to reduce college costs for folks that want to do so (which are covered herein). Fuel costs are up, but so is fuel efficiency (although on a net basis in real terms we’re probably behind compared to the 60s). And where health care is concerned… we’re paying for all of those advances of the last 40 years. But I read somewhere that 80% of Americans would be considerably better off with a (relatively inexpensive) catastrophic health care policy, as opposed to the group/managed care policies that they have. (That is, most Americans over-insure themselves where health care is concerned.)
So, the bottom line is that folks who want to live as we did during the Halcyon Days can do so for fairly little money… but they have to be willing to give up some mod cons… which most folks are simply unwilling to do.
To sdr’s earlier point about eating out, my recollection is the same as his. My family probably ate out at a sit-down restaurant once a month (and there were precious few choices). And then we probably had a bucket of chicken or hamburgers plopped down on the table once or twice a month on top of that. Otherwise, dinner was cooked at home. Today this is almost unimaginable. Folks simply eat out (or get carry-out) considerably more than they used to. Some can afford to do so, but clearly most cannot.
Participant[quote=Arraya]
But, to the idea of; if these people would “live within their means” and accept the fact that they are not “what ever consumption level” our economy would be better off, is not even a valid line of thought – if they did not open up the spigots of easy credit decades ago – we would not have the economy we have today – it would have ran into problems years ago – or the reality of our economy would have been exposed years ago and that is something nobody wants to face. [/quote]We would not have the economy we have today… in fact, it would be much healthier (re: less leverage and risk), in my view, albeit at a lower level of GDP. If we had grown at 2.5% annually over the last 25 years instead of 3%, but we didn’t have all of the incremental debt that’s built up (which engendered that incremental GDP growth), we’d be in much better financial shape today, although, again, we would have left some GDP on the table, so to speak. Personally, that’s a trade-off I would make every single time.
[quote=Arraya]
Quite possibly, some of those living the good life, “within their means”, would not be where they are without those living above their means.
[/quote]
There’s undoubtedly some truth to this, although it’s all relative and the numbers are hard to gauge. That is, the folks running a successful consumer finance company – just to use an obvious example – might still be very successful, albeit not AS successful as the credit bubble has made them (for now – they still have to collect those outstanding balances!). But certainly there are a lot of folks worth $10 million (pick a number) that would be worth half of that without “the spenders/borrowers”.
[quote=Arraya]
Interestingly, a sudden rash of people being frugal and living within their means actually, in the short-term, is detrimental to social functionality because it increases unemployment, decreases tax receipts, etc… We all know wall street would boo and hiss consumer spending going down. Kind puts a new meaning on what it is to be responsible, eh?[/quote]
Indeed, Lord Keynes’ Paradox of Thrift raises its ugly head…Participant[quote=Arraya]
But, to the idea of; if these people would “live within their means” and accept the fact that they are not “what ever consumption level” our economy would be better off, is not even a valid line of thought – if they did not open up the spigots of easy credit decades ago – we would not have the economy we have today – it would have ran into problems years ago – or the reality of our economy would have been exposed years ago and that is something nobody wants to face. [/quote]We would not have the economy we have today… in fact, it would be much healthier (re: less leverage and risk), in my view, albeit at a lower level of GDP. If we had grown at 2.5% annually over the last 25 years instead of 3%, but we didn’t have all of the incremental debt that’s built up (which engendered that incremental GDP growth), we’d be in much better financial shape today, although, again, we would have left some GDP on the table, so to speak. Personally, that’s a trade-off I would make every single time.
[quote=Arraya]
Quite possibly, some of those living the good life, “within their means”, would not be where they are without those living above their means.
[/quote]
There’s undoubtedly some truth to this, although it’s all relative and the numbers are hard to gauge. That is, the folks running a successful consumer finance company – just to use an obvious example – might still be very successful, albeit not AS successful as the credit bubble has made them (for now – they still have to collect those outstanding balances!). But certainly there are a lot of folks worth $10 million (pick a number) that would be worth half of that without “the spenders/borrowers”.
[quote=Arraya]
Interestingly, a sudden rash of people being frugal and living within their means actually, in the short-term, is detrimental to social functionality because it increases unemployment, decreases tax receipts, etc… We all know wall street would boo and hiss consumer spending going down. Kind puts a new meaning on what it is to be responsible, eh?[/quote]
Indeed, Lord Keynes’ Paradox of Thrift raises its ugly head…Participant[quote=Arraya]
But, to the idea of; if these people would “live within their means” and accept the fact that they are not “what ever consumption level” our economy would be better off, is not even a valid line of thought – if they did not open up the spigots of easy credit decades ago – we would not have the economy we have today – it would have ran into problems years ago – or the reality of our economy would have been exposed years ago and that is something nobody wants to face. [/quote]We would not have the economy we have today… in fact, it would be much healthier (re: less leverage and risk), in my view, albeit at a lower level of GDP. If we had grown at 2.5% annually over the last 25 years instead of 3%, but we didn’t have all of the incremental debt that’s built up (which engendered that incremental GDP growth), we’d be in much better financial shape today, although, again, we would have left some GDP on the table, so to speak. Personally, that’s a trade-off I would make every single time.
[quote=Arraya]
Quite possibly, some of those living the good life, “within their means”, would not be where they are without those living above their means.
[/quote]
There’s undoubtedly some truth to this, although it’s all relative and the numbers are hard to gauge. That is, the folks running a successful consumer finance company – just to use an obvious example – might still be very successful, albeit not AS successful as the credit bubble has made them (for now – they still have to collect those outstanding balances!). But certainly there are a lot of folks worth $10 million (pick a number) that would be worth half of that without “the spenders/borrowers”.
[quote=Arraya]
Interestingly, a sudden rash of people being frugal and living within their means actually, in the short-term, is detrimental to social functionality because it increases unemployment, decreases tax receipts, etc… We all know wall street would boo and hiss consumer spending going down. Kind puts a new meaning on what it is to be responsible, eh?[/quote]
Indeed, Lord Keynes’ Paradox of Thrift raises its ugly head…Participant[quote=Arraya]
But, to the idea of; if these people would “live within their means” and accept the fact that they are not “what ever consumption level” our economy would be better off, is not even a valid line of thought – if they did not open up the spigots of easy credit decades ago – we would not have the economy we have today – it would have ran into problems years ago – or the reality of our economy would have been exposed years ago and that is something nobody wants to face. [/quote]We would not have the economy we have today… in fact, it would be much healthier (re: less leverage and risk), in my view, albeit at a lower level of GDP. If we had grown at 2.5% annually over the last 25 years instead of 3%, but we didn’t have all of the incremental debt that’s built up (which engendered that incremental GDP growth), we’d be in much better financial shape today, although, again, we would have left some GDP on the table, so to speak. Personally, that’s a trade-off I would make every single time.
[quote=Arraya]
Quite possibly, some of those living the good life, “within their means”, would not be where they are without those living above their means.
[/quote]
There’s undoubtedly some truth to this, although it’s all relative and the numbers are hard to gauge. That is, the folks running a successful consumer finance company – just to use an obvious example – might still be very successful, albeit not AS successful as the credit bubble has made them (for now – they still have to collect those outstanding balances!). But certainly there are a lot of folks worth $10 million (pick a number) that would be worth half of that without “the spenders/borrowers”.
[quote=Arraya]
Interestingly, a sudden rash of people being frugal and living within their means actually, in the short-term, is detrimental to social functionality because it increases unemployment, decreases tax receipts, etc… We all know wall street would boo and hiss consumer spending going down. Kind puts a new meaning on what it is to be responsible, eh?[/quote]
Indeed, Lord Keynes’ Paradox of Thrift raises its ugly head…Participant[quote=Arraya]
But, to the idea of; if these people would “live within their means” and accept the fact that they are not “what ever consumption level” our economy would be better off, is not even a valid line of thought – if they did not open up the spigots of easy credit decades ago – we would not have the economy we have today – it would have ran into problems years ago – or the reality of our economy would have been exposed years ago and that is something nobody wants to face. [/quote]We would not have the economy we have today… in fact, it would be much healthier (re: less leverage and risk), in my view, albeit at a lower level of GDP. If we had grown at 2.5% annually over the last 25 years instead of 3%, but we didn’t have all of the incremental debt that’s built up (which engendered that incremental GDP growth), we’d be in much better financial shape today, although, again, we would have left some GDP on the table, so to speak. Personally, that’s a trade-off I would make every single time.
[quote=Arraya]
Quite possibly, some of those living the good life, “within their means”, would not be where they are without those living above their means.
[/quote]
There’s undoubtedly some truth to this, although it’s all relative and the numbers are hard to gauge. That is, the folks running a successful consumer finance company – just to use an obvious example – might still be very successful, albeit not AS successful as the credit bubble has made them (for now – they still have to collect those outstanding balances!). But certainly there are a lot of folks worth $10 million (pick a number) that would be worth half of that without “the spenders/borrowers”.
[quote=Arraya]
Interestingly, a sudden rash of people being frugal and living within their means actually, in the short-term, is detrimental to social functionality because it increases unemployment, decreases tax receipts, etc… We all know wall street would boo and hiss consumer spending going down. Kind puts a new meaning on what it is to be responsible, eh?[/quote]
Indeed, Lord Keynes’ Paradox of Thrift raises its ugly head…August 8, 2011 at 10:55 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #716013Participant[quote=pri_dk][quote]First, the collateral issue is a red herring […][/quote]
And a country doesn’t really have a balance sheet the same way an individual or corporation does.
What are the assets of the Federal government? (e.g. what is Yosemite worth? – could we sell it to raise some cash?)
Dave makes the important points – including the point that cash flow is the dominant factor in this issue.
Many people fall into the trap of comparing government debt to personal/consumer debt. There are key differences.
Debt is not always bad, and the situation is not as bad as many make it out to be.
(Don’t agree that debt is not always bad? Then answer this: Why is Rich’s investment firm suggesting that it would be a very smart move for people to refinance into a 30 year loan right now?)[/quote]
Another important issue is that the govt. doesn’t account for spending they way a corporation would. Specifically, the govt. doesn’t differentiate between “investments” (the cost for which would be amortized over a period instead of expensed on Day 1) and “operating expenses,” which go down a rabbit hole.
Again, all in all, the US is not a particularly healthy creditor… but we’re far from dying.
August 8, 2011 at 10:55 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #716103Participant[quote=pri_dk][quote]First, the collateral issue is a red herring […][/quote]
And a country doesn’t really have a balance sheet the same way an individual or corporation does.
What are the assets of the Federal government? (e.g. what is Yosemite worth? – could we sell it to raise some cash?)
Dave makes the important points – including the point that cash flow is the dominant factor in this issue.
Many people fall into the trap of comparing government debt to personal/consumer debt. There are key differences.
Debt is not always bad, and the situation is not as bad as many make it out to be.
(Don’t agree that debt is not always bad? Then answer this: Why is Rich’s investment firm suggesting that it would be a very smart move for people to refinance into a 30 year loan right now?)[/quote]
Another important issue is that the govt. doesn’t account for spending they way a corporation would. Specifically, the govt. doesn’t differentiate between “investments” (the cost for which would be amortized over a period instead of expensed on Day 1) and “operating expenses,” which go down a rabbit hole.
Again, all in all, the US is not a particularly healthy creditor… but we’re far from dying.
August 8, 2011 at 10:55 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #716702Participant[quote=pri_dk][quote]First, the collateral issue is a red herring […][/quote]
And a country doesn’t really have a balance sheet the same way an individual or corporation does.
What are the assets of the Federal government? (e.g. what is Yosemite worth? – could we sell it to raise some cash?)
Dave makes the important points – including the point that cash flow is the dominant factor in this issue.
Many people fall into the trap of comparing government debt to personal/consumer debt. There are key differences.
Debt is not always bad, and the situation is not as bad as many make it out to be.
(Don’t agree that debt is not always bad? Then answer this: Why is Rich’s investment firm suggesting that it would be a very smart move for people to refinance into a 30 year loan right now?)[/quote]
Another important issue is that the govt. doesn’t account for spending they way a corporation would. Specifically, the govt. doesn’t differentiate between “investments” (the cost for which would be amortized over a period instead of expensed on Day 1) and “operating expenses,” which go down a rabbit hole.
Again, all in all, the US is not a particularly healthy creditor… but we’re far from dying.
August 8, 2011 at 10:55 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #716853Participant[quote=pri_dk][quote]First, the collateral issue is a red herring […][/quote]
And a country doesn’t really have a balance sheet the same way an individual or corporation does.
What are the assets of the Federal government? (e.g. what is Yosemite worth? – could we sell it to raise some cash?)
Dave makes the important points – including the point that cash flow is the dominant factor in this issue.
Many people fall into the trap of comparing government debt to personal/consumer debt. There are key differences.
Debt is not always bad, and the situation is not as bad as many make it out to be.
(Don’t agree that debt is not always bad? Then answer this: Why is Rich’s investment firm suggesting that it would be a very smart move for people to refinance into a 30 year loan right now?)[/quote]
Another important issue is that the govt. doesn’t account for spending they way a corporation would. Specifically, the govt. doesn’t differentiate between “investments” (the cost for which would be amortized over a period instead of expensed on Day 1) and “operating expenses,” which go down a rabbit hole.
Again, all in all, the US is not a particularly healthy creditor… but we’re far from dying.
August 8, 2011 at 10:55 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #717213Participant[quote=pri_dk][quote]First, the collateral issue is a red herring […][/quote]
And a country doesn’t really have a balance sheet the same way an individual or corporation does.
What are the assets of the Federal government? (e.g. what is Yosemite worth? – could we sell it to raise some cash?)
Dave makes the important points – including the point that cash flow is the dominant factor in this issue.
Many people fall into the trap of comparing government debt to personal/consumer debt. There are key differences.
Debt is not always bad, and the situation is not as bad as many make it out to be.
(Don’t agree that debt is not always bad? Then answer this: Why is Rich’s investment firm suggesting that it would be a very smart move for people to refinance into a 30 year loan right now?)[/quote]
Another important issue is that the govt. doesn’t account for spending they way a corporation would. Specifically, the govt. doesn’t differentiate between “investments” (the cost for which would be amortized over a period instead of expensed on Day 1) and “operating expenses,” which go down a rabbit hole.
Again, all in all, the US is not a particularly healthy creditor… but we’re far from dying.
August 8, 2011 at 10:01 AM in reply to: OK, we are down graded: AA+ (Still a long way from F+ guys) #715963Participant[quote=davelj]A thought experiment.
You work at a bank. A woman comes to borrow money from the bank. Here are the basics of her financial situation (admittedly incomplete, but in the ballpark):
She earns $140K/year after-tax. She’s a consultant and her job is very stable. In a really bad year her income might dip 5% (as it did recently), but it rarely increases by more than 3% in real terms. But, again, over the long term her income is quite stable. The current outlook is that her income will be basically flat for the next 5-10 years. She has been spending a bit more than her income for the last several years but says that she’s gotten this under control. She has $360K in debt. About half of that – or $180K – is a mortgage fixed at 4.5% for 30 years. She has no equity in her house, however. Although clearly there’s plenty of income to cover the mortgage. The other $180K in debt is a revolving credit line (interest-only) at 4% that matures every five years. The current five year term is up and she’s looking to renew it through your bank.
Now, from a collateral perspective, she doesn’t look too great – not much net worth there. On a cash-flow basis, however, she looks pretty good because her income is very stable and her ability to cover her fixed payments is good. Also, with a little discipline, she should be able to reduce her spending to a break-even level as well.
How do you feel about this borrower from an underwriting perspective?[/quote]
Everyone hit on some good points, but of course as we are, in fact, talking about Ms. America, there’s a deus ex machina (or few) to consider in this underwriting exercise…
First, the collateral issue is a red herring – only cashflow matters to our creditors (unlike a bank). Second, we can print money and raise taxes to pay our bills if need be, so our creditors will always get paid back, albeit the possibility of getting paid back in a currency of reduced value is a real (and growing) risk. Third, the dollar is the world’s reserve currency, with all that implies. And fourth, our major creditors have few other attractive “risk-free” alternatives – we’re one of the better houses (but not the best) on a very sketchy block.
So, yes, in a vacuum – sans the deus ex machinas – the US looks like a very weak credit. Probably can service the debt for quite some time, but not comfortably and there are some serious long-term issues. But when the full picture is taken into account, we’re still a weak credit – don’t get me wrong – but the situation isn’t as bad as it appears at first glance… which is one reason why our rates are so low (in addition to Fed shenanigans) despite our inherent issues.
So, in my view, we need to slowly reduce our considerable debt load (at the household and government levels) and the politicians need to produce balanced budgets, but… we’re not facing the End of Times from a credit perspective.
Just my 2 cents.
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