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Debt borrows from the future economy

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May 20, 2010 – Comments (10)

There are some pretty disturbing graphs on debt on dshort.com.

I have never been one to like short term debt, always paying back debt for anything but mortgage very quickly.  Credit cards are always paid in full each month.

The way I look at debt is I compare it to how it messes up future choices in household spending.  For example, a couple times I have had the money on hand for a purchase and there has been some "do not pay now" promotion, and/or a percentage back if you buy it on their credit card.  When these purchases come due they always mess up financial choices and decisions.  They are for something you bought 6 months or a year ago and now you want something else, but the money has to go to pay off the debt (at least in my household).  So, it is always a squeeze on future disposable income, or there are just other bills that come up at the same time.

For my choices I have always take the short term pain and gotten rid the debt and refrained from spending.  The debt charts show that that is not the typical choice for many.  But eventually the debt catches up and you can't continue to add to it and people can not continue to spend beyond their means.  Those charts show that many people are not left with little choice and must face big, long term pain now.  That simply has to leave the economy sluggish for a long, long time.

10 Comments – Post Your Own

#1) On May 20, 2010 at 10:41 PM, ChrisGraley (29.67) wrote:

Everyone please pay attention to this post.

If you want things to get better, it's the only way. 

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#2) On May 20, 2010 at 11:41 PM, MikeMark (29.43) wrote:

Good post.

The way I look at this is that the past decade has been the supersize me decade. The average household bought larger homes, more expensive cars, went on more trips and generally spent more, whether they could afford to or not. Often their primary residence was used as a piggy bank of sorts in a borrow and spend frenzy. Home values kept rising and people trusted their loan officers to tell them what they could afford, without realizing that the loan officer's job is to make money for the bank.

This decade looks like it will be the downsize us decade. The effects are already here. People are short-selling homes and looking for something smaller to buy or even build. They are paying down debt in an attempt to regain some sanity and control. Many are selling anything they can to keep a lifestyle that they never could afford. It appears to be very deflationary.

It's interesting. I think the systems (economies) would recover within a few months if the governments would just stop over-regulating and spending as if money is air. However it looks like governments are getting caught in their own web of self-deception, just as the people did. The period ahead looks challenging.

Good luck to all!

-MikeMark

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#3) On May 20, 2010 at 11:45 PM, d1davidtiming (28.81) wrote:

I am with you.  All credit cards get paid every month in full.  Hopefully we will not be the loners, but be in the majority soon.  Most importantly, our government needs to do the same- make the hard decisions- cut spending, pay down debt. 

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#4) On May 21, 2010 at 12:28 AM, simplemts (< 20) wrote:

Have paid mine in full every month since I first got mine.  Why spend money you do not have?  (I find an exception with car and house loans but ONLY if the interest rates are advantageous to you (i.e. less in interest than in savings account, CD, treasury, etc.)

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#5) On May 21, 2010 at 1:12 AM, Tastylunch (29.19) wrote:

always always pay credit cards in full very month. Always have. CC debt is the worst type to carry imo.

have a bad feeling the gov't will let the cc cards ding us for doing so in the future though.

the thing I don't like about the CC business is that they benefit from your bad choices and get hurt by your good ones. Therefore it incentivizes them to encourage you to be irresponsible...

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#6) On May 21, 2010 at 1:35 AM, guiron (20.43) wrote:

It's interesting to me that the consumer is often the scapegoat in discussing retail loans and consumer debt. This ignores the source of the problem, the loan originator. The consumer lending industry has been pushing for less regulation and more leverage forever, and they got it, hence a lot of people getting a lot of revolving debt who typically would not have qualified 30 years ago. This seems to work fine with explosive growth rates and overleveraged debt fueling the economy, but when it all comes to a halt, so does the ability of the consumer to service those insane interest rates and outrageous fees.

And then the consumer gets blamed, but here's the thing - if you hand it out, people will take it, even to their ultimate detriment. People will not turn down easy money, even if the terms are unrealistic. If you want to solve the problem, don't allow this to happen in the first place, meaning do not allow predatory lending and usury. If you blame the consumer, you'll ignore the real source of the problem the next time the finance lobbyists come to DC and ask to loosen the reins again, so they can help the "little guy."

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#7) On May 21, 2010 at 8:51 AM, dwot (52.34) wrote:

Great comments.

quiron, I couldn't agree more, lending laws should be more restrictive and they should get more restrictive on the amount of money loaned in terms of the ability to service the debt as rates go down, for example, at 10% say 30% of household income could go to mortgage.  At 4% it should only be about 20% allowed.  This builds wiggle room for long term debt and the household problems that come over the long term, job loss, relationship breakdown, serious maintenance problems, etc.

The reason I say a higher percent at a higher interest rate is because at a higher interest rate it is very easy for consumers to reduce their debt burden by simply making modest increases to their payments.  It just isn't so a low rates.

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#8) On May 21, 2010 at 8:54 AM, russiangambit (29.13) wrote:

> And then the consumer gets blamed, but here's the thing - if you hand it out, people will take it, even to their ultimate detriment. People will not turn down easy money, even if the terms are unrealistic. If you want to solve the problem, don't allow this to happen in the first place, meaning do not allow predatory lending and usury. If you blame the consumer, you'll ignore the real source of the problem the next time the finance lobbyists come to DC and ask to loosen the reins again, so they can help the "little guy."

I don't paticularly agree with that. I think the US protects consumers pretty well. After all, it  is a country of lawyers. The consumers need to learn one simple thing - there is no free lunch. And the sooner they learn it , the better for everybody involved. If you keep protecting them from themselves, they never learn it.

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#9) On May 21, 2010 at 1:34 PM, PeteysTired (< 20) wrote:

If you keep protecting them from themselves, they never learn it.

BINGO!

And the same goes for other gov't handouts.  Why find a job if unemployment is enough to get you by.  I know I have been there.

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#10) On May 22, 2010 at 8:56 AM, dwot (52.34) wrote:

russiangambit, the laws need to be there to also protect the financial system.  It is one thing for someone to get themselves into trouble with poor money management.

What we have seen is a near collapse of the financial system because of foolish lending and the massive bailouts and talk to people in failed banks who lost part of their savings -- they were the ultimate of living fiscally responsible just to have a system with poor regulations basically steal from them.

There are tons of things that people never learn from that have spillover costs for the rest of us, so screw their ability to learn, lets have fiscal regulation that protects what the rest of us have worked for.

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