debt as a deterrent to spending

[lemur]

I couldn't think of an antonym for "stimulus," but could debt be the antithesis of fiscal stimulus in terms of encouraging spending? This thought occurred to me when reading recent political articles about republican criticisms of deficit-spending as hurting economic growth, preventing job-creation, etc. At first this just sounded like a reversal of the by now well-known liberal political logic that deficit spending encourages growth and job-creation. However, I have begun to wonder whether debt, both public and private, stimulate people to avoid spending because they're worried about the consequences of debt. Maybe if people were free of debt, they would also be free-er to consume and work based on the allocation of economic surpluses instead of doing so with the focus on repaying debt. Or would being out of debt just stimulate people/government to take more loans and spend the money to end up in the same indebted situation they were in before?

[TonyMcC]

People, such as myself, who have no debts get more for their money than people who are in debt. The simple reason for this is that we don't give away a portion of our income to banks etc. in interest. Banks, of course, like people who live their lives in debt.

[CaptainPanic]

I agree with TonyMcC: The debt of a country just says how much of the taxes will be given to banks (without anything in return).

 

It's stupid that countries are in debt. I understand that in times of crisis the spending can exceed state-income, but this should be compensated.

However, short-term political gain encourages politians not to increase taxes to pay off the debt.

 

In response to the thread title: just a debt will not be a deterrentto spending - but a massive debt can at some point become paralyzing because you essentially hand over the finances of a country to the banks, and thereby the power of the country falls into the hands of the banks. And banks have other priorities than the total welfare of a country, because they're not elected.

 

I would therefore propose that national banks get elected directors and management or that state banks are nationalized (because they're often not).

[swansont]

People, such as myself, who have no debts get more for their money than people who are in debt. The simple reason for this is that we don't give away a portion of our income to banks etc. in interest. Banks, of course, like people who live their lives in debt.

 

Not all debt is bad, though. Few people could own a home, or even a car (especially when they're young), without taking out a loan. They can still be worth it even with the interest as part of the cost. The danger is in using debt when it's not needed.

[CaptainPanic]

Not all debt is bad, though. Few people could own a home, or even a car (especially when they're young), without taking out a loan. They can still be worth it even with the interest as part of the cost. The danger is in using debt when it's not needed.

There used to be a time when a house was transferred from parents to children... free of debt.

All the accumulated wealth of parents could theoretically be transferred to children at some point.

Somehow it is strange how each new generation is again getting a mortgage for a house.

 

You describe the convention (what is normal)... but you give no argument as to why it is like that.

 

The amount of money we pay to banks in the form of interest is staggering. I wouldn't be surprised if somehow the money going to banks is in the same order of magnitude as the tax we pay. I mean, we pay direct mortgate interest. Credit card interest. Student loan interest (not that much, but I'll include it). Interest to other loans. Our countries pay significant mounts of intrerest as well, and they use our tax money for it. The company where I work pays interest (which theoretically reduces the money spent on salaries or profit).

 

I cannot imagine that even half of all that interest is really necessary, and I think that it would be economically interesting to try and find ways to reduce the interest we pay to banks.

[swansont]

There used to be a time when a house was transferred from parents to children... free of debt.

All the accumulated wealth of parents could theoretically be transferred to children at some point.

Somehow it is strange how each new generation is again getting a mortgage for a house.

 

You describe the convention (what is normal)... but you give no argument as to why it is like that.

 

Houses are finite in size. There's only so many people you can put into them. At some point parents + adult children and spouses + their kids means someone has to go buy a new house. Inheriting a house really only works if you have one child; otherwise you are diluting the wealth.

 

Accumulated wealth (in the US) can still be passed along unless you are both fairly wealthy and not particularly savvy with money, which is probably unusual for someone who is wealthy.

[CaptainPanic]

Houses are finite in size. There's only so many people you can put into them. At some point parents + adult children and spouses + their kids means someone has to go buy a new house. Inheriting a house really only works if you have one child; otherwise you are diluting the wealth.

 

Accumulated wealth (in the US) can still be passed along unless you are both fairly wealthy and not particularly savvy with money, which is probably unusual for someone who is wealthy.

True, I didn't take population growth into account... but in the Netherlands the population is practically stagnant, and the average number of occupants in a house has also been rather constant for the last 5-6 decades, so that shouldn't be of importance. If I would inherit half a house, and my partner would get another half, then we would have 1 house together... which is exactly what we need.

 

The problem is tax and interest. If we would both just get half a house from our parents, and put our money together to buy 1 new house, then we'd be fine. No interest. No mortgage. However, such a large gift cannot be made without paying tax. So, in order to make sure that my parents get the mandatory half house, I must take a loan (and pay interest). I must compensate the tax by a loan.

 

Also, nation-wide, cheap houses are being replaced by more expensive houses. That means that unless I wish to live in the exact same house as my parents, my parents can give me my half house. I lose 0.1 to tax, receiving only 0.4 of the house. But since I must buy a newer house in another location, it's worth only 0.2 new-house. (note: the numbers are just an example).

 

And therefore, even if my parents would give me my share in their own house, it's not nearly enough. And I still need a massive loan, and therefore I need to pay interest.

 

People oppose the tax systems, but take all the interest for granted... and I think it's weird.

[lemur]

It's stupid that countries are in debt. I understand that in times of crisis the spending can exceed state-income, but this should be compensated.

However, short-term political gain encourages politians not to increase taxes to pay off the debt.

I don't understand when people think it's a good idea to pay off government debt? If people sold all their treasury bonds back to the treasury, how would they save their money if no new treasury bonds were being sold?

 

In response to the thread title: just a debt will not be a deterrentto spending - but a massive debt can at some point become paralyzing because you essentially hand over the finances of a country to the banks, and thereby the power of the country falls into the hands of the banks. And banks have other priorities than the total welfare of a country, because they're not elected.

When an economy is overheated, it has a tendency to culminate in meltdowns. For a government to invest in deflationary measures, it has to transfer money to agents that will freeze the money. Freezing money is very difficult because lots of people want it and are willing to offer practically anything (and sometimes everything) to get it. Banks are the institutions with the greatest interest in withholding lending during deflation because they cannot sell collateral for the full price of recovering the loan value. Thus if you want to expedite the deflationary trend to get the economy growing again, the best thing to do is give all the money to the banks and tell them to hold it until prices bottom-out. This can take a long time, though, when government fiscal policy becomes oriented toward preventing the deflation in the first place.

 

I would therefore propose that national banks get elected directors and management or that state banks are nationalized (because they're often not).

This would allow the popular will to excessive cheap money to determine bank policies. This would be like having a school where the kids get to vote on how many A's to give out.

 

True, I didn't take population growth into account... but in the Netherlands the population is practically stagnant, and the average number of occupants in a house has also been rather constant for the last 5-6 decades, so that shouldn't be of importance. If I would inherit half a house, and my partner would get another half, then we would have 1 house together... which is exactly what we need.

Dutch politics tends to have a fixation with statistically-determined assumptions about resource-distribution with the presumption that everyone should get an equal share of whatever is available. As I understand it, the low population growth of the Netherlands has to do with increasing childlessness and emigration. This means that people are having kids with the expectation that housing will become available by others vacating it. This is disturbing when so much of the Dutch news seems to be about anti-immigration politics. I think the Netherlands needs to expand its territory somehow, though I think this will have to happen globally since there are probably Belgian and German interests against giving up land to Dutch governance.

 

Back to the OP: if people are devoting income to paying off debt and interest, doesn't that prevent that income from being spent/invested in growing the economy? Couldn't you even say that the best way to slow/stop a growth economy would be to slowly replace its cash flows with flows of deficit-spending, since that would give the creditors a means to reign in the economy?

Edited February 16, 2011 by lemur

[swansont]

I don't understand when people think it's a good idea to pay off government debt? If people sold all their treasury bonds back to the treasury, how would they save their money if no new treasury bonds were being sold?

 

 

The government isn't the only entity who borrows money. People buy government bonds because they are low-risk (and tend to be low-yield, relatively speaking), not because they are the only game in town.

[lemur]

The government isn't the only entity who borrows money. People buy government bonds because they are low-risk (and tend to be low-yield, relatively speaking), not because they are the only game in town.

Yes, I know. I should have specified that people would only have the option of saving money in higher-risk investments if savings bonds would no longer be available. I don't think many people who dislike government debt would prefer to force all money to be either invested in risky ventures or hidden under mattresses.

[CaptainPanic]

I don't understand when people think it's a good idea to pay off government debt? If people sold all their treasury bonds back to the treasury, how would they save their money if no new treasury bonds were being sold?

Because America pays 6% of its total tax income to banks in the form of interest?

 

The USA collects tax, and then gives 6% of that to banks... just because they borrowed money.

 

I think that's enough reason.

 

Technically, banks can be made non-profit... especially if they are very large (just like insurances can be non-profit).

There are options to spend less on these mega-institutions that gobble up a lot of money. I'm not saying we must abandon the whole concept... but a little less would be a good idea.

Edited February 16, 2011 by CaptainPanic

[Saryctos]

Debt is good. If you are profitable, you want as much debt as you can get. Buy widgets on credit, sell widgets for a profit, pay interest with a portion of widget sales, net profit. In a way, debt is like inflation. You want some, but not too much as to screw you.

 

Problems crop up the moment you start thinking that operations will always be profitable and you stop being concerned about the interest payments if you don't make your projected sales.

 

Back to the OP: if people are devoting income to paying off debt and interest, doesn't that prevent that income from being spent/invested in growing the economy? Couldn't you even say that the best way to slow/stop a growth economy would be to slowly replace its cash flows with flows of deficit-spending, since that would give the creditors a means to reign in the economy?

Credit expands spending power. The "loss" to the economy of payments towards debt are offset by the purchases allowed by the credit extended to those businesses, much like the widget example above. The best way to slow the economy is to allocate more funds to paying down your debts, as you won't be spending it on revenue generating operations.

[CaptainPanic]

Debt is good. If you are profitable, you want as much debt as you can get. Buy widgets on credit, sell widgets for a profit, pay interest with a portion of widget sales, net profit. In a way, debt is like inflation. You want some, but not too much as to screw you.

A government is not about profit. A government is not a company.

 

A person taking a loan to go on holiday certainly isn't about profit. And a person investing in a house is not after profit either. Real estate cannot be profitable forever (else it becomes the bubble that it now is).

 

I totally agree that you must allow companies to borrow money to invest, and to make profit.

 

But I disagree that governments and private individuals should be allowed a loan in so many cases.

[lemur]

Because America pays 6% of its total tax income to banks in the form of interest?

 

The USA collects tax, and then gives 6% of that to banks... just because they borrowed money.

 

I think that's enough reason.

How would you prefer to see people save their money then?

 

Technically, banks can be made non-profit... especially if they are very large (just like insurances can be non-profit).

There are options to spend less on these mega-institutions that gobble up a lot of money. I'm not saying we must abandon the whole concept... but a little less would be a good idea.

Non-profit status doesn't necessarily mean that an organization is operating at maximum efficiency or minimizing costs, but you're right and I believe there are non-profit banks that exist. It sounds like what you want is just to streamline the banking industry. You could layoff employees, but you'd end up having to find income for them through some other economic channel. You could also cut their wages without laying anyone off, which would also reduce banking costs.

 

What exactly is your end-goal with reducing costs? I ask this because as long as the ultimate goal is to keep humans alive and reproducing, you have to have SOME means of distributing labor and the means to consume at least basic necessities.

 

 

[CaptainPanic]

How would you prefer to see people save their money then?

Anyway, I just mentioned that I see no problem at all with companies that borrow money for investments. And that would be a nice way to invest, and get interest based on actual (physical) growth of an economy. No problem so far.

 

The problem comes from the fact that I, as an individual, lose money on debts. Other people invest in ME and my country (which I pay with my taxes). I pay interest. My country pays interest. And these people who invest in ME expect profit - which means I have to work to pay for their profit. I dislike that very much, but the system practically forces me to accept this.

 

And the interests that these people get is a lot more than what I get on my humble savings account at the bank. My savings account gets me just a few % interest (about 3% I believe)... but if I borrow money, that will cost me at least 6%.

Edited February 16, 2011 by CaptainPanic

[lemur]

Anyway, I just mentioned that I see no problem at all with companies that borrow money for investments. And that would be a nice way to invest, and get interest based on actual (physical) growth of an economy. No problem so far.

But when people invest in companies, those companies past their costs along to the consumer. So what's the difference between the price going up a few percentage points due to tax or due to business costs, such as investor dividends, personnel costs, etc.? "Physical" and "actual" economic growth are not the same, and they're often in conflict with growth of GDP/revenue. For example, the economy grew physically/actually with the building of many new houses and other structures during the early 2000s. This actual/physical growth resulted in abundance-driven supply-side competition that lowered real-estate prices, thus lowering revenues/GDP growth. So in a way it is good for people to invest directly in physical/actual growth of businesses, but the problem it creates is that once rising productivity-levels result in abundance, the resultant GDP losses are disproportionately shifted to a certain number of people who lose their jobs/income/etc. while the rest of the people try to maintain their income levels despite overall losses. Thus, the irony is that productivity-driven abundance has the potential to provide enough for everyone, but because of the way markets value commodities and distribute revenues, people end up fighting harder over money as a result, with more people getting disenfranchized by the resulting recession.

 

The problem comes from the fact that I, as an individual, lose money on debts. Other people invest in ME and my country (which I pay with my taxes). I pay interest. My country pays interest. And these people who invest in ME expect profit - which means I have to work to pay for their profit. I dislike that very much, but the system practically forces me to accept this.

I don't understand why people always say that they "have" to pay taxes. How is anyone being forced to make an amount of money that results in taxable income? Why can't you just reduce your income to tax-free levels and live off of that? Why not leave the taxes to people who refuse to curtail their spending and income needs to tax-free levels?

 

And the interests that these people get is a lot more than what I get on my humble savings account at the bank. My savings account gets me just a few % interest (about 3% I believe)... but if I borrow money, that will cost me at least 6%.

Theoretically you could shop around for a higher interest rate. Just be careful that the bank you choose doesn't disappear from the internet tomorrow leaving no trace of your accounts. You're right, though, about banks reducing costs and narrowing the gap between lending and savings interest rates. A bank with no overhead could theoretically pay the same interest rates on savings that it offers on loans. In fact, you could lend money out directly this way and not have to pay anyone else to do anything for you. The problem you would run into would be how to enforce repayment in the event of default, which requires court-costs, etc.

 

 

[TonyMcC]

Not all debt is bad, though. Few people could own a home, or even a car (especially when they're young), without taking out a loan. They can still be worth it even with the interest as part of the cost. The danger is in using debt when it's not needed.

 

I absolutely agree. I could never have bought my house without a mortgage and certainly bank loans helped me purchase my first cars. I suppose I came across as "holier than thou". However I think debt should be kept to an absolute minimum and it should be appreciated that anything bought on a loan is going to cost more than the same item bought for cash. Impatience costs money. It is rare for interest charged to be less than money lost through inflation. Even "interest free" credit usually hides a better possible deal using cash.

[swansont]

But when people invest in companies, those companies past their costs along to the consumer. So what's the difference between the price going up a few percentage points due to tax or due to business costs, such as investor dividends, personnel costs, etc.? "Physical" and "actual" economic growth are not the same, and they're often in conflict with growth of GDP/revenue. For example, the economy grew physically/actually with the building of many new houses and other structures during the early 2000s. This actual/physical growth resulted in abundance-driven supply-side competition that lowered real-estate prices, thus lowering revenues/GDP growth. So in a way it is good for people to invest directly in physical/actual growth of businesses, but the problem it creates is that once rising productivity-levels result in abundance, the resultant GDP losses are disproportionately shifted to a certain number of people who lose their jobs/income/etc. while the rest of the people try to maintain their income levels despite overall losses. Thus, the irony is that productivity-driven abundance has the potential to provide enough for everyone, but because of the way markets value commodities and distribute revenues, people end up fighting harder over money as a result, with more people getting disenfranchized by the resulting recession.

 

Wait, what? US housing prices went down in the oughts? I seem to recall a bubble, i.e. wildly inflated prices.

[lemur]

Wait, what? US housing prices went down in the oughts? I seem to recall a bubble, i.e. wildly inflated prices.

Supposedly the bubble burst, but I think you could say that people stopped buying but that price-equilibrium has yet to be established. Currently, I think there are attempts at marketing certain properties as retaining or gaining value regardless of market-swings. This, of course, assumes that a certain level of economic liquidity can be sustained for elites despite whatever may happen to "the bottom of the iceberg," so to speak. Bailouts and stimulus have been intended, I think, to prevent large-scale devaluation by artificially maintaining revenue-levels and jobs, but it is entirely possible that the economy will be slowly allowed to deflate and that real-estate values will stabilize and begin trading again at levels dramatically below (some people's) expectations. The big question is whether the long-term economic recovery will be a revival of the post WWII style gradual-inflation-driven-growth or whether it will be some form of economy where property doesn't appreciate but still gets traded as people continue to seek (unprofitable) means to satisfy economic needs and wants.