US Debt

[Hazir]

Holy crap, your area is even more expensive than my area.

To stay slightly more on topic, I agree with Rand and I think wiggin. Banks should be for short-term cash supply, and other places should be for more long-term savings. The banks should still have enough even with only everyone's short-term cash to do their business.

Moving further back off topic, Rand: You might want to reconsider paying down your home fast. I know it's tempting, I'm tempted to do the same thing, but if your interest rate is anything like mine, you're better off financially paying the minimum each month and putting the rest of that money to work for you. This is even more true if the UK has a mortgage credit on taxes like the US does.

I fail to see why you 'agree' with either Randblade or Wiggin. You say you think banks can have a useful function. And that is no different than what is generally accepted, Wiggin has a tentative grip on (as his 'savings' are more common sense than underpinned by his investment philosophy) and Randblade was merely reflecting on his own financial situation.

If you were thinking about 'saving' as a useful phenomenon, you can't agree with both Wiggin and Randblade. At least not on the basis of what they wrote above. Because in that Wiggin is merely repeating his Keynesian ideas, albeit moderated with some common sense saving, and Randblade is just reflecting on the fact that things have not quite worked out as he expected but he's been acting quite prudent compared to others in his age group. Or in short; Randblade is a saver, Wiggin isn't. You can't agree with both.

As for paying down your mortgage debts; I think that is always a very good idea. AFAIK the UK doesn't have a deduction for interest paid on a home loan. That means that every penny not paid in interest is extra money for you to dispense of at will. It's has been my guiding principle, and it enabled me to pay off my house in Amsterdam and buy the one in Istanbul. It's not unlikely that it will enable me to buy a new apartment in Istanbul for retirement while keeping my present property as a source of income.

And just so that there is no mistake about that; I have a decent enough income but I am nowhere near a situation where my payslip whould strike people with awe.

[RandBlade]

No the UK doesn't have mortgage credit on taxes, I've never understood why that should exist.

I agree the mortgage interest is incredibly low now - 2.99% fixed is what I'm currently paying, changing to a variable rate of Base Rate + 1.49% next October (currently base is just 0.5% so just 1.99% it'll be). That's virtually free money. I don't however think rates are going to stay this low forever. In a few years they could easily be 5%, 10% or more. I don't want to be lumbered with still having a massive mortgage and paying the rates on that then. The low rates now are an opportunity that may not last forever.

Plus the more paid off now, in the future when we have kids if we want a bigger house it'll be easier.

EDIT: No Hazir, both Wiggin and I are saving, we're just saving in different ways. Wiggin is saving in Stocks and Shares, I'm saving in Bricks and Mortar.

[Hazir]

No the UK doesn't have mortgage credit on taxes, I've never understood why that should exist.

I agree the mortgage interest is incredibly low now - 2.99% fixed is what I'm currently paying, changing to a variable rate of Base Rate + 1.49% next October (currently base is just 0.5% so just 1.99% it'll be). That's virtually free money. I don't however think rates are going to stay this low forever. In a few years they could easily be 5%, 10% or more. I don't want to be lumbered with still having a massive mortgage and paying the rates on that then. The low rates now are an opportunity that may not last forever.

Plus the more paid off now, in the future when we have kids if we want a bigger house it'll be easier.

EDIT: No Hazir, both Wiggin and I are saving, we're just saving in different ways. Wiggin is saving in Stocks and Shares, I'm saving in Bricks and Mortar.

There is a difference between deleveraging (you) and investing (he). Unless you are stupid and still believe your home is an investment. Real estate is only an investment if you don't have to live in it.

[RandBlade]

There is a difference between deleveraging (you) and investing (he). Unless you are stupid and still believe your home is an investment. Real estate is only an investment if you don't have to live in it.

Of course my home is an investment. I may have to live in it, I don't have to own it though.

[Hazir]

Of course my home is an investment. I may have to live in it, I don't have to own it though.

Well, then you are really the worst type of investor. You could have made tons of money shorting the euro (just an example). Now you are losing money because you locked your money into a heap of bricks with an ever declining value.

But of course you are not really an investor, you just went with some smart guy's rebranding of your consumption because it makes you feel all hot and happy.

[RandBlade]

Well, then you are really the worst type of investor. You could have made tons of money shorting the euro (just an example).

Perhaps but there's a difference between long-term and short-term investments. Bricks and mortar is a long-term investment, shorting is most definitely a short-term gamble.

Now you are losing money because you locked your money into a heap of bricks with an ever declining value.

If you think that the bricks are going to be ever decling in value, I think that you're wrong.

But of course you are not really an investor, you just went with some smart guy's rebranding of your consumption because it makes you feel all hot and happy.

I never said I was an investor, I said it was an investment. Rent is a consumption, interest-only is consumption. Actually buying a property is not just consumption.

[wiggin]

I fail to see why you 'agree' with either Randblade or Wiggin. You say you think banks can have a useful function. And that is no different than what is generally accepted, Wiggin has a tentative grip on (as his 'savings' are more common sense than underpinned by his investment philosophy) and Randblade was merely reflecting on his own financial situation.

If you were thinking about 'saving' as a useful phenomenon, you can't agree with both Wiggin and Randblade. At least not on the basis of what they wrote above. Because in that Wiggin is merely repeating his Keynesian ideas, albeit moderated with some common sense saving, and Randblade is just reflecting on the fact that things have not quite worked out as he expected but he's been acting quite prudent compared to others in his age group. Or in short; Randblade is a saver, Wiggin isn't. You can't agree with both.

As for paying down your mortgage debts; I think that is always a very good idea. AFAIK the UK doesn't have a deduction for interest paid on a home loan. That means that every penny not paid in interest is extra money for you to dispense of at will. It's has been my guiding principle, and it enabled me to pay off my house in Amsterdam and buy the one in Istanbul. It's not unlikely that it will enable me to buy a new apartment in Istanbul for retirement while keeping my present property as a source of income.

And just so that there is no mistake about that; I have a decent enough income but I am nowhere near a situation where my payslip whould strike people with awe.

For the record, I think that paying off a mortgage before other sorts of investing can be cost-effective and worthwhile, but not always so. In general, though, people who have most of their money tied up in real estate when they start getting towards retirement are fairly foolish. Housing is not a panacea investment - in fact, it's extremely illiquid, subject to unpredictable volatility, and tied to ONE sector of the economy. It's like most of your wealth being tied up in shares of a single company that's very thinly traded.

That's not to say it's not sometimes worthwhile to buy a home early or pay it off quickly. It depends, among other things, on the tax environment, job security, the likely performance of equities, trends in mortgage rates (and, in the US, whether you have a variable or fixed rate mortgage), etc. But these are questions that have little to do with a pathological fear of debt and more to do with a hard-headed assessment of costs, returns, and risks.

My wife and I made our best investments when we were in college - we both took out fairly small loans (near the US average) to fund our educations. The details are complicated, but they're a mix of fixed and variable rate loans whose interest can be deducted from taxable income. It would be a very simple matter for us to pay off all of the loans today - the amount isn't that much if you have a decent job. But we don't because we'd prefer to let a variable rate loan at ~2.5% alone; it's almost losing value to inflation over time (not quite, but close), and combined with the tax deduction, we actually would be losing money if we paid off the loan early. That's a comparison to cash savings, let alone a real investment. Why would it make sense to pay off something early for no good reason other than a fear of owing money to someone?

I'm not going to argue about each person's specific circumstances and whether or not they are investing wisely - frankly, it's not my business, and I'm sure most of us are bright enough to manage things on our own, thank you very much. But I think we can all agree that investment decisions shouldn't be made on the basis of emotion, unreasonable fears, or attachments to a particular type of investing. They should be made on the basis of mathematical models taking into account an individual's risk tolerance and prevailing economic conditions.

Holy crap, your area is even more expensive than my area.

Yeah, unfortunately there are certain factors that guide my choice of where to live in a given city that pay little attention to property values. As a result, I end up paying through the nose, but at least I live in very nice areas. I could probably buy a small condo for $200-250k, but that would necessitate moving again once we have kids, and probably isn't worth it on the short term given the costs.

[Hazir]

For the record, I think that paying off a mortgage before other sorts of investing can be cost-effective and worthwhile, but not always so. In general, though, people who have most of their money tied up in real estate when they start getting towards retirement are fairly foolish. Housing is not a panacea investment - in fact, it's extremely illiquid, subject to unpredictable volatility, and tied to ONE sector of the economy. It's like most of your wealth being tied up in shares of a single company that's very thinly traded.

That's not to say it's not sometimes worthwhile to buy a home early or pay it off quickly. It depends, among other things, on the tax environment, job security, the likely performance of equities, trends in mortgage rates (and, in the US, whether you have a variable or fixed rate mortgage), etc. But these are questions that have little to do with a pathological fear of debt and more to do with a hard-headed assessment of costs, returns, and risks.

My wife and I made our best investments when we were in college - we both took out fairly small loans (near the US average) to fund our educations. The details are complicated, but they're a mix of fixed and variable rate loans whose interest can be deducted from taxable income. It would be a very simple matter for us to pay off all of the loans today - the amount isn't that much if you have a decent job. But we don't because we'd prefer to let a variable rate loan at ~2.5% alone; it's almost losing value to inflation over time (not quite, but close), and combined with the tax deduction, we actually would be losing money if we paid off the loan early. That's a comparison to cash savings, let alone a real investment. Why would it make sense to pay off something early for no good reason other than a fear of owing money to someone?

I'm not going to argue about each person's specific circumstances and whether or not they are investing wisely - frankly, it's not my business, and I'm sure most of us are bright enough to manage things on our own, thank you very much. But I think we can all agree that investment decisions shouldn't be made on the basis of emotion, unreasonable fears, or attachments to a particular type of investing. They should be made on the basis of mathematical models taking into account an individual's risk tolerance and prevailing economic conditions. .

That particular tiff was about the idiocy of calling your home an investment. While I totally underwrite the prudence of buying one's house and paying it off, I think you have to be a real idiot to think you are actually investing.

I know the situation you are talking about where you are in a position where you could pay off a loan but where it is actually paying not to do so. It's a bit of a tipping point, and I also waited till the moment that the advantage of the debt vs liquid funds was too small to bother any longer with the whole arrangement. Then I simply wrote a transfer order and that was the end of my mortgage. Since I consider my house my home, that was a good decision. I freed up a big chunk of my monthly income and that gives me a lot of freedom. IF however my house is an investment my actions were beyond stupid. If the roughly €400K weren't bound in mortar and bricks I could have made a killing, even if I only would have bought gold for it 2 years ago.

Gold went up 30% over the last two years. I could have rented a hell of a nice place for the €200,000 I would have had extra today.

[RandBlade]

That particular tiff was about the idiocy of calling your home an investment. While I totally underwrite the prudence of buying one's house and paying it off, I think you have to be a real idiot to think you are actually investing.

Of course you're investing. A house is a home, an investment and a liability - all wrapped up in one. It is an asset that you do not need to own and can
I know the situation you are talking about where you are in a position where you could pay off a loan but where it is actually paying not to do so. It's a bit of a tipping point, and I also waited till the moment that the advantage of the debt vs liquid funds was too small to bother any longer with the whole arrangement. Then I simply wrote a transfer order and that was the end of my mortgage. Since I consider my house my home, that was a good decision. I freed up a big chunk of my monthly income and that gives me a lot of freedom. IF however my house is an investment my actions were beyond stupid. If the roughly €400K weren't bound in mortar and bricks I could have made a killing, even if I only would have bought gold for it 2 years ago.[/quote] You could have made a killing or you could have made a loss.

Gold went up 30% over the last two years. I could have rented a hell of a nice place for the €200,000 I would have had extra today.

Hindsight is 20/20. You could have invested in Gold, or could have invested in something much less successful. The FTSE 100 is worth no more now than it was 14 years ago - nominally! In real terms the whole Labour government was a complete write-off, it was no higher nominally and much lower in real terms.

Long-term housing (especially in the UK) has one of the highest growth rates of all investments.

"Buy land. They've stopped making it." - Mark Twain

[Hazir]

Oh, the pied piper and his lovely tunes. I have a bridge for sale at a real knock-down price in a prime location. Interested in investing?

FYI the housing market in the UK is a typical boom-bust market where people are losing the shirt of their backs on an almost regular basis. Living is not investing, it's consuming a good and/or service whereever you lay emphasis.

[RandBlade]

Oh, the pied piper and his lovely tunes. I have a bridge for sale at a real knock-down price in a prime location. Interested in investing?

No thanks, don't see much of a resale market for bridges.

FYI the housing market in the UK is a typical boom-bust market where people are losing the shirt of their backs on an almost regular basis. Living is not investing, it's consuming a good and/or service whereever you lay emphasis.

And? Many investment markets are boom-bust markets, I don't have an issue with that. Gold prices plummeted in the 90's, oil dropped nearly 50% after 2007, the stock markets regularly crash. Boom-bust kind of reinforces the notion of investment

Consumption means that you consume the product and there's generally nothing left afterwards. I consume a Big Mac, I don't then have a lifelong supply of Big Macs afterwards.

If I pay my mortgage over 25 years for a house instead of renting the house then after 25 years am I forced to move out? As I've consumed the house am I unable to sell it?

[ImAnOgre]

Rand, Gold is not a sound investment in my opinion. The only reason people invest in it is because the economy is so poor. When the economy returns, Gold will drop. This is of course my opinion only.

[Hazir]

Rand, Gold is not a sound investment in my opinion. The only reason people invest in it is because the economy is so poor. When the economy returns, Gold will drop. This is of course my opinion only.

Interesting and true, if the economy recovers over the next 6-12 months. If everything tanks, then gold would be the next best thing to canned food and candles.

[CitizenCain]

Rand, Gold is not a sound investment in my opinion. The only reason people invest in it is because the economy is so poor. When the economy returns, Gold will drop. This is of course my opinion only.

Might wanna take a second look at that. (Not that I'd recommend investing in it right now either - it's buy low, sell high, not the other way around - just that gold's been gaining value even when the economy's not in the shitter, in recent history.) I say that because gold seems to be trending up over the long term pretty significantly, even through the "good" economic years after the dot-com bubble burst. I even had a post/gloat thing about that on here a while back, but the search feature seems to have eaten it, as I can't seem to find it now searching on any of the words I **know** are in there, such as "gold." <grumble>

[GGT]

Had some fun reading (and re-reading) this thread, then thinking back to when I'd started a thread about Debt as Profit. T'was a while ago, maybe even at Atari.


Comparing sovereign debt to personal debt is especially priceless. Along the same lines of Pay no attention to that man behind the curtain!" in our current global political and economic crises.

Of course, nations aren't quite the same as individual people, and neither is their debt or credit (in amount or quality).

It's telling that our global economic crises are swirling around short term deficits, debts and credits, instead of long term savings and spendings---as investment vehicles for the future. The worst kind of disconnect has occurred....when families or individuals don't trust educational debt, in exchange for future career profits.

The US hasn't been much better about debt than Greece. We're just fortunate enough to have our own currency and "printing press". Practically speaking, we owe our debt to and among ourselves, mostly to future generations. Technically, though, the US is beholden to anyone who holds our Treasury debt....like China.

Europe as a united economic zone, or using a common currency, can't function with political polarity as well as the US...because our central banks are fundamentally different. The US has its own "printing press" and can manipulate the USD (just as we accuse China of doing that with their own currency), while the Euro Zone doesn't.

The IMF or UCB doesn't really have equal mates in the US. Probably a good thing, actually.

[Loki]

It's telling that our global economic crises are swirling around short term deficits, debts and credits, instead of long term savings and spendings---as investment vehicles for the future.

Mistake #1. Debt = long-term.

The worst kind of disconnect has occurred....when families or individuals don't trust educational debt, in exchange for future career profits.

Mistake #2. Educational debt is increasing, which is inconsistent with the idea that people are less likely to obtain it.

The US hasn't been much better about debt than Greece. We're just fortunate enough to have our own currency and "printing press".

Mistake #3. The main reasons we're not having the same issue as Greece are the the size of the US economy and the perceived lack of risk in US assets, based on past performance.

Practically speaking, we owe our debt to and among ourselves, mostly to future generations. Technically, though, the US is beholden to anyone who holds our Treasury debt....like China.

China has 8% of total US debt.

Europe as a united economic zone, or using a common currency, can't function with political polarity as well as the US...because our central banks are fundamentally different.

Mistake #4. The main problem facing the EU is not the inability to print money, but rather the lack of central control over fiscal policy. At the present moment, the EU can't compel member states to not run massive deficits, which is the fundamental reason for the current debacle.

The US has its own "printing press" and can manipulate the USD (just as we accuse China of doing that with their own currency), while the Euro Zone doesn't.

Mistake #5. The ECB intervenes in the foreign exchange market, just like the Fed. But unlike China, it doesn't attempt to set the value of its currency (similar to the US).

Pretty impressive list of factual mistakes in one post.

[GGT]

And yet, every developed nation is grappling with debt and deficit spending. The eurozone is in dire straits. All of our finances and markets are inter-mingled, and de-coupling was a mythical theory now quite soundly disproven.

You might have gotten a special kick from making your list of my factual mistakes, Loki. But it doesn't really solve any problem, even if we both say fiscal and monetary policy are at odds.

[Hazir]

Mistake #1. Debt = long-term.



Mistake #2. Educational debt is increasing, which is inconsistent with the idea that people are less likely to obtain it.



Mistake #3. The main reasons we're not having the same issue as Greece are the the size of the US economy and the perceived lack of risk in US assets, based on past performance.



China has 8% of total US debt.



Mistake #4. The main problem facing the EU is not the inability to print money, but rather the lack of central control over fiscal policy. At the present moment, the EU can't compel member states to not run massive deficits, which is the fundamental reason for the current debacle.



Mistake #5. The ECB intervenes in the foreign exchange market, just like the Fed. But unlike China, it doesn't attempt to set the value of its currency (similar to the US).

Pretty impressive list of factual mistakes in one post.

Mistake 1, debt is being rolled over continuously, it is not a problem that necessarily needs to stay away untill far in the future.
Mistake 2, inertia is one of the main reasons why patterns in education stay what they are and taking out loans for education is still growing, there have to be serious doubts if this will pay off for all who engage in it.
Mistake 3, the lack of risk percieved in US sovereign debt is indeed based in the fact that the US will never be in a position not to pay back its debts (unless the crazies in Congress decided to stop the 'printing' of money.
Mistake 3a, thinking that a single party holding 8% of your sovereign debt is not a big deal
Mistake 4, so far off the mark that I don't even know where to begin, you don't understand the EU and you don't understand the crisis

[Loki]

Mistake 1, debt is being rolled over continuously, it is not a problem that necessarily needs to stay away untill far in the future.

And? It still means that debt levels today are based on long-term spending/taxation levels.

Mistake 2, inertia is one of the main reasons why patterns in education stay what they are and taking out loans for education is still growing, there have to be serious doubts if this will pay off for all who engage in it.

If doubts are increasing, why are loans increasing? If we had inertia but people were becoming less trusting of their merits, there would be a gradual decrease.

Mistake 3, the lack of risk percieved in US sovereign debt is indeed based in the fact that the US will never be in a position not to pay back its debts (unless the crazies in Congress decided to stop the 'printing' of money.

A) That never prevented plenty of other countries from defaulting.
B) If the US was to print too much money, inflation would end up having the same effect as a partial default.

Mistake 3a, thinking that a single party holding 8% of your sovereign debt is not a big deal

Considering that the American people hold most of it, I guess that means the US government is far more beholden to the American people.

Mistake 4, so far off the mark that I don't even know where to begin, you don't understand the EU and you don't understand the crisis

Only if you don't know the difference between proximate causes and underlying causes. There's a reason why there are now proposals to limit the fiscal authority of member states.

[Hazir]

And? It still means that debt levels today are based on long-term spending/taxation levels.

If doubts are increasing, why are loans increasing? If we had inertia but people were becoming less trusting of their merits, there would be a gradual decrease.

A) That never prevented plenty of other countries from defaulting.
B) If the US was to print too much money, inflation would end up having the same effect as a partial default.

Considering that the American people hold most of it, I guess that means the US government is far more beholden to the American people.

Only if you don't know the difference between proximate causes and underlying causes. There's a reason why there are now proposals to limit the fiscal authority of member states.

1. longterm solvency prognostics have a bearing on present liquidity
2. the fact that people still rack up loans at the old pace is that the message hasn't come home yet, that for some it no longer pays, nobody wants to be the first to admit he's been a sucker.
3A. see your own claim about who owns US debt; the US government will not default because it has a cheaper way of beggaring it's creditors; inflation
3B. not with the US dollar effectively being the currency of other non-issuing commodity exporters AND the Chinese lapping up obscene amounts of US sovereign debt
4. 8% is enough to cause the US government serious headaches, all by itself and without internal debt holders having to act.
5. limiting fiscal freedom is merely a lever, it's not a goal in itself.

[Nessus]

Considering that the American people hold most of it, I guess that means the US government is far more beholden to the American people.

But on the other hand, it is far easier/less risky for the US government to shoot American people.

[Loki]

But on the other hand, it is far easier/less risky for the US government to shoot American people.

Really? History suggests the US is far more likely to shoot other country's people than its own.

[Nessus]

True, but China has nukes.

[Loki]

We could take out all of their nukes before they have any chance of firing them. We know where they are and we have the capability to take them out.

[Nessus]

[Ominous Gamer]

We could take out all of their nukes before they have any chance of firing them. We know where they are and we have the capability to take them out.

Lacking the context of the thread, this is an incredibly naive thing to believe.

[Loki]

This "naive" belief is shared by a vast majority of nuclear experts. The only countries in the world that have a second strike capability against the US are Britain, France, and possibly Russia (there are some who claim we can destroy all but a handful of Russian nukes before they'd be able to retaliate). The other states have a limited amount of terrain that can be used to hide nuclear weapons, would require several days to get the nuclear material into warheads, either have no submarines or we know where they are, and don't have a real air-component. Having said that, a nuclear attack would kill lots of civilians in the targeted countries, which not be a smart move in all but the most dire scenarios, and there's always the chance that one or two nukes would sneak through.

[Nessus]

How come the government is trusted to protect against nukes as efficiently as possible, but they aren't trusted to build or maintain roads and bridges? The government itself is destroyed if it doesn't do the anti-nuke job in the most efficient way, but the government doesn't lose anything for fraking up roads and bridges?

[Ominous Gamer]

Like how it went from all to almost all. Loki is learning

[Loki]

Like how it went from all to almost all. Loki is learning

There's a very high probability that not one Chinese nuclear missile would leave the ground. Nothing can be said with absolute certainty, and assuming otherwise is not particularly bright.

How come the government is trusted to protect against nukes as efficiently as possible, but they aren't trusted to build or maintain roads and bridges? The government itself is destroyed if it doesn't do the anti-nuke job in the most efficient way, but the government doesn't lose anything for fraking up roads and bridges?

They're trusted with doing both; they're just not particularly good with doing either efficiently. The difference is that private firms can do one out of those two without seriously jeopardizing national security.