The thing that i don't understand is how can people that live in the USA accumulate so much debt?
As a 24yo European I never had more than 5k € of debt at any point in my life.
As a 24yo European I never had more than 5k € of debt at any point in my life.
The end result is the entire working class is enmeshed in debt all the time just to stay even with where they would have been if the interest rates weren't so low.
It's astonishing how effective the upper class was at coming up with this policy to endebtify the entire middle and lower class without ever once talking with each other about how to do this or coordinating any actions to produce this result. It just sorta happened. Neat for them.
Household debt is overwhelmingly about home ownership, first of all which affects richer working people. Housing prices mainly have to do with housing scarcity in good areas, which is a density problem.
Workers have been getting fucked, but blaming interest rates is simplistic and counterproductive as the ability to do more fiscal stimulus as aided by low interest rates would be in their favor.
No, but they are definitely A problem.
Housing prices in a given market vary inversely with interest rates. Sure, scarcity has an effect which is why I said "in a given market". When someone goes to a bank looking for a home load, the first thing they are is what your income and expenses are. From there, they figure out how high your monthly payment can be, and from there using the current interest rates they calculate how much you can borrow. Everyone - sellers, agents, banks - pressure you to spend as much as possible, and one average they succeed. That means lower interest rates will enable you to pay more at the same monthly payment. In other words, the buyer will have roughly the same monthly payment regardless of interest rates. Those rates will determine how much money goes to the seller vs the bank over 15 or 30 years.
Low interest rates cause artificially high prices which don't benefit society, just the sellers. They also lead to banks not paying interest on savings, which discourages savings. They also encourage all sorts of high prices. The current cost of a college degree is due to government guarantees on student loans, which largely didn't exist when I got mine (at a much lower price even adjusted for inflation).
And finally, something I think is true but haven't worked out all the math. It's not lower interest rates that stimulate the economy, but the act of lowering them. If we were at a steady state, reducing rates by a fixed amount and keeping things steady should produce a short-term (perhaps a few years long) spike in GDP, after which things will return to an equilibrium possibly lower than before the rate decrease (or the same or slightly higher I don't know) but less than the short term bump. The opposite is also true, raising rates will cause problems so much be done very slowly. The Fed has the US economy backed into a corner of sorts. The only way out seems to be to ignite a lot of inflation and raise rates slowly so as not to cause another collapse like 2007 (which was triggered by an abrupt rate increase).
> In other words, the buyer will have roughly the same monthly payment regardless of interest rates. Those rates will determine how much money goes to the seller vs the bank over 15 or 30 years.
Yes
> Low interest rates cause artificially high prices which don't benefit society, just the sellers.
Private ownership of land is a racket, yes, but you as you just said the mortgage payment should be the same as effects bank vs seller's cut. The payment structure matters more than the total price.
> They also lead to banks not paying interest on savings, which discourages savings.
Was there every a time when working class savings amounted to something in aggregate? I suspect the whole "the holloi polloi needs to learn to be frugal" has been all moralization not economics for quite some time.
> The current cost of a college degree is due to government guarantees on student loans, which largely didn't exist when I got mine (at a much lower price even adjusted for inflation).
The problem here isn't rates, but the moronic guarantee without strings attached. This is classic privatization -> regulatory capture. The government should just fund public schools and private schools can go fend for themselves.
> And finally, something I think is true but haven't worked out all the math. It's not lower interest rates that stimulate the economy, but the act of lowering them.
Certainly monetary policy is overhyped and not neutral as the neoclassical ones believe. (Anybody with half a brain can see that the COVID stimulus payments had affect that a decade of QE didn't.)
Maybe check out https://jwmason.org/slackwire/the-natural-rate-of-interest/ I think that is pretty close to what you are saying. If there is no natural rate, but many different equilibria, then we do care more about changes to the rate than the rate itself in some sense.
They are what you get when people save too much money as money is zero sum. If one person saves, someone else doesn't. The only way to break this game is to stop saving or to lend the savings out. The private sector doesn't want them so rates drop to 0%. The government doesn't want them (ok biden changed course, go biden!). People hate government debt just as much even though they don't know that if the government doesn't take the debt it's the private sector that has to take it on and rich people have an easier time pushing the debt off to the weaker part of the population. e.g. financial crisis with subprime mortgages.
>They also lead to banks not paying interest on savings, which discourages savings
Everything would be fine if those savings were gone. For obvious reasons. Too much savings means there is no need for savings. Savings are only virtuous when they are needed. Kind of paradoxical isn't it? Because people want to be virtuous someone has to create a destination for those savings and it turns out the biggest destination is housing.
>It's not lower interest rates that stimulate the economy, but the act of lowering them.
It's much simpler. The 0% interest floor is purely man made and interest rates are still too high.
>The opposite is also true, raising rates will cause problems so much be done very slowly.
Raising rates would cause problems because rates are too high to begin with. Why would you want them to be even higher?
>The Fed has the US economy backed into a corner of sorts.
It hasn't. The Fed doesn't do anything. It's the private sector (companies, consumers, rich people) and the government that are doing everything to back the US economy into a corner. The Fed is merely the institution that has to act when everyone else failed to act and since the problem wasn't caused by the Fed it also cannot be solved by the Fed without giving it additional powers.
>The only way out seems to be to ignite a lot of inflation
The only way out? We are talking about an institution that is unable to meet its inflation goals. Of course it needs high inflation, not as a way out, it needs them to do something as boring as meeting its inflation target.
>and raise rates slowly so as not to cause another collapse like 2007 (which was triggered by an abrupt rate increase).
2007 wasn't caused by abrupt rate increases, it was caused by savers dumping their money into bad debt. The interest rate increase just caused all that bad debt to fail.
Be happy you guys got Biden. He's doing everything possible to ensure that the US economy recovers. Meanwhile I get to live in a country where the incompetent do nothing party got elected 16 years in a row. See you in 2% inflation heaven while we suffer in deflation hell.
Stimulus, incidentally, has much the same problem. Yeah, great, everyone gets $3000 or whatever, but now you're just in competition with other people who just got $3000. It's not a complete loss, of course, but people advocating for it always want to talk about the benefits in pre-stimulus currency, but people spend it in post-stimulus currency.
Just let the government take the debt and get this thing over with.
* Student debt. University costs a fuckton of money in the US, and you can pretty much find some way to cover it in debt. For young people this is probably the #1 category of debt.
* Mortgages. Basically, of all the debts, mortgages are the ones that don't really "count," since it's generally acquired for the purpose of specifically obtaining an asset and its bottom line on your net worth is going to be around 0. Also, there's some tax advantages to mortgages, so it's not really an issue to have mortgage debt.
* Medical debt. Yeah, this sucks.
* Personal debt, primarily credit card debt. Credit card debt is something that is likely to really screw financially literate people over: it tends to be very high interest, it tends to be marketed heavily to suggest that you're not being screwed by high interest (e.g., cash-back rewards!). The minimum payments are pretty low, so it's pretty easy to cut back on paying the card if finances are tight, without realizing just how much you're being screwed by the interest.
https://www.investopedia.com/personal-finance/american-debt-...
I vacillated as to whether or not to include it as a separate category, but ultimately I think it's reasonable to consider them as personal debt insofar as they contribute to a debt epidemic.
Additionally, credit cards are a way of buying things where the actual cost is wholly disconnected from the purchasing activity.
Purchasing something for $1 using a credit card feels (and acts) identically to purchasing something for $2000 using a credit card. The only difference is the size of the number being added to the balance, so buying "more than one can actually afford" via credit cards is far too easy, because for many it does not feel like "spending". I.e., there's no "physicality" of having to count out cash bills and seeing the pile grow.
As well, credit card payback rates as calculated by the banks are structured such that the principal is paid down as slowly as legally allowed, which naturally increases the banks profits at the detriment of the individual paying the bill (as most of the payment goes to interest, not principal, if paying the "minimum payment" calculated by the holding bank).
So it is simply very easy to obtain plural credit cards, and to use them to fuel an instant gratification lifestyle well beyond ones means without considering the consequences of loading up 20k or 30k or more onto credit cards on a take home salary of 2-3k/month.
And, once someone has gotten themselves dug into this deep pit of debt, it is extremely difficult to climb up out of the hole.
FYI, you can opt out of receiving these
https://www.consumer.ftc.gov/articles/prescreened-credit-and...
Denmark, the Netherlands, Iceland, Norway, Switzerland, Ireland, Sweden, Portugal, Finland, Spain, Greece, Belgium, and the UK all run higher household debt than Americans -- much higher in the case of the ones earlier on the list.
Source: https://www.oecd.org/sdd/fin-stats/statisticalinsightswhatdo...
Then you show up at college, and on your way to class on day 1, you are accosted by various banks handing out credit cards (or at least this was the case in the late-90s when I was at UVA).
Then, you finish college, and because real wages haven't changed in 40 years, you borrow more money to pay rent, pay back student loans, etc.
Americans have an unhealthy relationship with consumerism and credit. Doesn't help that credit is currently cheap, so buy-now, pay-later is the norm.
It's completely crazy, no disagreement. But, it's been this way for decades.
Not sure how much companies toe the line/what was going on at the event you saw.
from https://www.ftc.gov/sites/default/files/documents/statutes/c...:
(2) INDUCEMENTS PROHIBITED. —No card issuer or creditor may offer to a student at an institution of higher education any tangible item to induce such student to apply for or participate in an open end consumer credit plan offered by such card issuer or creditor, if such offer is made
From Wikipedia... Eliminates excessive marketing to young adults. Consumers under the age of 21 must prove that they have an independent income or get a co-signer before applying for a credit card. The Act also prevents credit card companies from mailing offers to consumers under 21 unless they "opt in," and prohibits companies from wooing students with T-shirts, free pizza and other free gifts at university-sponsored events.
Switzerland Australia Denmark Netherlands Canada Norway Cyprus New Zealand South Korea Sweden
But you as a European can't understand how people can have so much debt. Well maybe you don't understand that Europe is not homogeneous and vary a lot. So maybe your comment is relevant for a country but it's definitely not for Europe. Saying that you're European tells us nothing since it's to diverse.
My parents helped me with school a little bit, and I was before the recent increases, so I think I graduated with maybe 25k in debt for 5 years of college. I paid it off quick as I had an amazing job out of college and sold the business I built.
I've watched my sister who is 13 years younger have a lot more debt and facing a really long march to pay it off. It is doable as she has a masters in a great field with great pay, but it is still a many year process...
https://en.wikipedia.org/wiki/List_of_countries_by_household...
(And that's not even touching how much more stressful debt is in some parts of europe. In the US the bankruptcy courts and laws make it so much easier to bounce back after a going bankrupt, whereas it can be a completely life shattering experience in the old continent. Unless things changed recently)
Drowning people in debt is kind of what American society is optimized for.
> As a 24yo European I never had more than 5k € of debt at any point in my life.
Europe is...not America.
“The average loan debt for a bachelor’s degree among the class of 2019 was $28,950.” [0]
[0] https://www.nerdwallet.com/article/loans/student-loans/whats...
It is dreadfully easy to get lines of credit as a college student, and the banks specifically target students because they are a good combination of financially naive and likely to have high future earnings potential. My first week on campus I was handed over a dozen credit card applications.