The sad part is higher interest rates will lead to more layoffs
Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore. Banks often have some of the biggest and shiniest towers in downtowns all around the world. How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
And don't be fooled by the cash and airline miles that your credit card throws at you. You're paying for those "rewards" by fees that the banks and networks charge merchants, and they're ultimately built into increased prices that everyone pays. No one got rich from those crumbs, except the bankers.
I don't like debt, and it has truly gotten crazy, but I don't know a way around debt.
It's no utopia, but it works well enough.
Taking on debt to pay your daily living expenses is a recipe for disaster - and that is what the US govt. has been doing (and many individuals as well)
Even that isn't necessarily true - if one is broke but one needs a car for a better job they need to take on debt for the car. The debt definitely isn't an appreciating or incoming earning asset, but it is a good choice.
Unpopular opinion, and maybe I'm wrong here and I've just been lucky, but I've stopped seeing debt as a bad thing. You have to use it smartly of course, but I don't think there's a one-size-fits-all answer for what that means. Use it for daily living expenses? Sure, as long as you can pay it off every month. Never take out a loan and spend years saving for a car? Nah, or at least not when that interest rate was 2-3%. And I suppose that's where increasing interest rates come in: Get the 99% to stop buying.
Now with immediate injection of cash, assets are at prices which require money that an ordinary person will never have. They have to jump on the debt treadmill to acquire necessities.
Taking on unsecured debt is a bad idea. But if you are going to spend $100,000 on living this year and have $100,000 in the bank, you have two choices. Spend the $100,000 and have nothing. Or use the $100,000 to buy bonds or another income producing asset, then take a loan using that as collateral. As long as the interest you earn from your collateral is more than the rate you pay, you come out ahead.
Instead of having a bank account with $0, you have an investment account with $100,000, debt of $100,000, and you're earning interest on the investment account each month that hopefully covers the interest on the debt plus provides some extra income.
The 'asset' that the government is taking dept on to pay for its living expense is YOU. On the averaged timeline YOU are an income earning asset. The government takes some expenses (roads, education, water, safety) and out comes a taxpayer that has an average income earning lifespan.
You as an individual don't get to play the averages game quite as well. If you are borrowing money today to pay for your daily expenses it is highly likely that will be true tomorrow. You as an individual have risks like getting fired and not getting a new job, or getting smooshed in a car accident. These are risks your lenders take on when figuring out the rate your loans will have, if you even get a loan at all.
this is a good rule of thumb, but there are exceptions. say I want to buy something that costs much less than my net worth, but more than I typically keep in my checking account. I have the choice between a) selling investments, b) taking out a loan, or c) deferring new investments until I've accumulated enough cash.
there are pros and cons to each. with a), I'm paying capital gains tax that I could otherwise defer. with b), I'm taking the risk that my cash flow dries up and I need to sell assets anyway on top of paying interest. and with c), I'm taking the risk that my cash inflates away while I'm saving up.
you can't know with certainty which is best, but b) is usually optimal with a sufficiently low rate.
All economies are run on debt [0]
[0] https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
Without debt, economic growth nearly zero sum. Waiting for the money to exist and then spending it is just slow and inefficient most of the time. Show me a country that is under-banked and has little access to loans and I will show you a poor country.
If, and when the system collapses, who cares? Advancements gained through technology will be with us.
Islamic finance is the solution to a balanced and fair economy.
1. It prohibit interest to outlaw debt based exploitation and instead replaces it with loans of generosity (pay back exact amount, no interest ) or fund raising through investment. Whereby the risk of the person receiving investment is shared with the lender. This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
2. Zakat - a wealth tax on every Muslim. The value of 2.5% of cash, stocks, investment each year is given to the most needy of society.
Implement these systems and you will have a just economy that prevents hoarding and exploitation. Literally money is forced to move down societal class and acquiring more wealth is with increased risk. Islamic finance is the solution.
The thing with interest, there is very little in terms of going back. As mentioned in this thread the entire modern global economy is built on usurious financial instruments. This was not really the case a few hundred years ago where the level and extent of debt was not to the extremes of today.
Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said, “A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet said, “Whoever does not consume it will be affected by its dust.”
Source: Musnad Aḥmad 10191
Grade: Sahih (authentic) according to Ahmad Shaki
Maybe we would not be in this mess in the first place if we sustained insights of the past.
When this system was made 2500 years ago it worked, because it was new and adapted to the conditions then. Then guess what, the world changed and those systems stopped working because the assumptions they are built on no longer exist.
If you brought a lifeform from 2500 years ago to the world today it would get sick and die. It's defense system would not be adapted to the threats it would experience. Yet this is the first thing people try to do with the complex systems we create and they will suffer the same fate.
Is this not already the case?
> This is in contrast with a conventional loan where if your property or business burns down, you still have to pay off the loan to the bank.
Isn’t this what insurance is for?
Interest seems like it can be both good and bad. Condemning it completely seems a bit harsh
Amusingly enough, California mortgages for purchase are non-usurious and compatible with this definition, because the lender can only go after the property in case of default, not the borrower.
They pay thousands on monthly mortgage, if they are late, they are charged a penalty (more interest). If they fail to pay all together, then the property is gone. All the money the borrower dedicated to paying off the mortgage gives them nothing in return. Essentially robbery.
This is exaggerated to the point of nonsense. I.e. it's literally not clear whether you are hyperbolising for effect, or have no idea what you're talking about.
You pay the bank for the use of the money. After 1 fully-paid year of your 30 year mortgage, you own 1.2% of the property. Or more precisely, your debt obligation is reduced by 1.2%.
After 15 years, you own 32%. After 20 years, 50%. After 30 years, 100%. It's not linear, which upsets people, but it makes perfect sense if you do the math.
In the mean time, if the property appreciates in value, all of that extra value belongs to you.
If you stop paying the mortgage at any time, yes the bank will repossess the house to get the money you still owe them. Not all of your future payments, just the remaining debt. If the sale price is in excess of your remaining debt, they send you a check.
Moral of the story: Do not mortgage short-term housing, except in rapidly increasing markets. And even/especially then, beware.
Corollary: Rental property is a necessary thing, and landpeople provide an essential service.
Reality: Some landthings suck.
With a conventional loan, if your borrower sinks, they still owe you the money. Lender would have collateral to possess. There is still an outstanding amount of debt that needs to be paid.
Insurance is not permitted under Islamic finance as it falls under transactions that have excessive uncertainty. There is no guarantee what the outcome is for an insurance transaction. It is like gambling, you make a bet with the insurance company such that you pay $xxx a month. If the contracted event happens (or never occurs), there is a financial winner and a loser. If in total I pay less premiums than the cost of the event, I "win". If I pay more in total for an event, I stand to make a loss and the insurance company benefits.
Interest seeks to empower people who have money by making them more and more richer. It exacerbates price of essentials such that the only way to acquire is through a usurious loan. House price are in the hundreds of thousands because people have been "temporarily" handed have hundreds of thousands. If interest loans didn't exist, then houses would be at prices which people can afford through their salary.
Isn’t this how a mortgage works? Put some money down, and allocate a portion of your monthly salary to pay the remainder.
> Interest seeks to empower people who have money by making them more and more richer.
The largest and most profitable companies in the world are oil/gas and technology. Wealth inequality would definitely still exist
Without a mortgage system, at most a few years of saving to fully buy a house.
I understand what you are saying when you think it is a similar thing, just the scale of numbers is different. Debt is a responsibility, and a really serious one. At all costs avoid it because there is no guarantee you will have the capabilities to pay it back + interest . If we can champion a system whereby buying assets does not involve an individual taking on a life destroying risk and instead they can use their normal income to save up in a reasonable amount of time, then this would be the best way.
Yes there will always be people and entities that are richer than the rest. The aim is not to squash every class into the same income bracket, rather stop the propogation of abuse that rich companies inflict by extracting wealth from the poor.
Stoping usurious interest loans means the economic interaction of rich with the poor. If they want to make money from their hoard, then they have to engage with the lower class on a level playing field (in terms of risk) with investing. In stark contrast to sitting on a throne and receiving guaranteed wealth from poor people who have no choice but to take on soul crushing debt.
An endless treadmill of debt which failing to pay substantially speeds it up until an individual can not sustain themselves.
Perhaps the solution to such a complex problem isn’t as simple as a “do this and don’t do that”. Perhaps a complex problem should be looked at more multi-dimensionally.
Like most things, loans can be good and loans can be bad. Context matters. The rule of law is meant to protect people and keep the economy healthy. The law is ever-evolving. Sometimes it comes up short but in a healthy nation it can adapt itself to the times.
Regarding mortgage, most people in the west use their home as their retirement fund. After 10-15 years of ownership, the house is often worth twice as much as their total mortgage. The difference between what the outstanding debt and the value of the asset is called equity, and this can be quite substantial.
Bizarre statement.
You should look at the cost to build a house. And the cost of maintenance.
Builders don't make obscene profits. You can cherry pick good years, but you need to average over 10-20 years.
You can buy an older/used house for significantly less than its replacement cost.
Are you arguing that without the mortgage system, skilled trades would work for lower wages? Labor is 70% of the cost of building a house. Materials are 25%, Paperwork is 5%.
Would lower wages for skilled trades be a good thing? For whom?
Land cost varies from almost 0% to more than 100% of the build cost, depending on location.
Its much worse than that. Without a 'gold standard' or really any standard. Money = debt.
For anyone to have any money, others have to have debt. For 50 million retirees to have millions of $ means there is more than that of people in debt.
For a politician to 'forgive debt' means the value must come from someone else, primarily retirees.
>Someday, maybe we, as a society, will realize that debt, credit, and lending is the way bankers scam money out of everyone else, and we collectively won't put up with it anymore.
That's kind of the problem. Lets say we won't put up with it anymore. It ends. No more debt akin to many other empires in antiquity. How do we go about it? Mainly you want to adjust the fractional bank ratio and reserves. Currently 13% or so depending on lots of factors.
So has anyone tried this? Moldova post-USSR has been trying this. It basically destroyed their economy. They never got there, they were close to 2:1 which is crazy good but it ended up just stagnating and wrecking them. Yes lots of confounders here but imagine you can't take on debt. You never have a mortgage. You must buy cash. Guess you're starting to work very early to save enough money to move out of your parents home? homes wont be a good bet neither, without mortgages. Safe investments in retirement funds have to be attracted elsewhere. House prices will be constantly pressured downward but suppliers and construction people want to get paid.
>How did they get them? Interest, fees, and charges. I can't count how many times people (even on this very site!) have said something like "don't buy things with cash, invest it and get a loan for it instead because interest." It's no mystery as to why you don't have a tower, because you're paying for someone else's.
They take their cut of the transaction and take no risks or liabilities on. Smart business.
>Normal people figured this out such a long time ago, that a verse in the Bible says that the borrower is slave to the lender. I'm no slave.
Without debt though, how do you live in a house? You rent? Rent is about the same price as the mortgage. You're paying someone else tower as it were. You should virtually never rent.
It's interesting how the whole system is designed around debt and yet there's only 1 proposed system that might fix this.
Social credit. https://en.wikipedia.org/wiki/Social_credit
Source, I lived through high/hyper inflation and was educated on this topic by rich people there.
Inflation is considered bad because it affects everyone, though the poorer you are the more it affects you.
Job losses affect those who lose their jobs and indirectly the economy due to less spending. Inflation affects everyone and run away inflation is one of the worst thing a country can experience.
Job losses affect the entire economy: the rich don't care since they do not rely employment and wages.
In contrast the wealthy are hit enormously by inflation as they start losing in real terms.
The fed prioritizing inflation over unemployment is a massive hit to the working classes. Doesn't matter if eggs only increased by 2% if you lost your home because there are no more jobs.
Umm, the poor are hit far harder by inflation than the rich. And it hits everyone in a way unemployment does not, that's why its far more important to fight inflation.
Ask your self this question. If inflation keeps going and interest rates go up to 10%. Who will buy the houses that come available on the market that people can no longer afford?
The rich or the poor?
And who will be the main sellers of those homes?
The rich or the poor?
https://www.brookings.edu/blog/future-development/2022/03/18...
https://www.deccanherald.com/opinion/comment/does-inflation-...
https://goldcountrymedia.com/news/135064/how-inflation-makes....
It matters very little if eggs go up by 10% each year if wages go up by 10% each year.
Of course what we have is stagflation: wage growth is not keeping up with inflation. Even then, raising interest rates to cause a recession is a really awful way to hack down a metric. Again: lose a job or lose 3% in real income a year?
In contrast the billionaire losing 10% a year in real terms looks at inflation as a catastrophic outcome and would gladly sacrifice everyone else's well being to keep his numbers up.
Best case scenario we end up in late 2008 with 10% unemployment but with a 10% rate. Place your bets on which drug problem will destroy the working class: opioids again?
Also bankruptcy laws if someone is going to mention black friday
We only saw high inflation after a year of worldwide Covid insanity, driven by cheap and abundant liquidity coupled with peak globalism (that is now in decline on an absolute basis, exacerbated by the Russia sanctions) coupled with global supply chain & labor shortages (some of which is generational demographics catching up to us)
I’ll link when I do but basically for the past 8 months he’s been explicitly saying he wants to get unemployment up, that he doesn’t mind risking the labor market in his efforts of “demand destruction”, never seen an appointed official say this before so he’s going hard
Here is him being a little tame to Congress https://www.cnn.com/2022/06/23/economy/fed-jerome-powell-hou...
but he has some speeches where he’s basically like “we’re going to raise unemployment” not “could”, not a “maybe a soft landing is possible but here are the risks”, just pain
https://www.bloomberg.com/news/articles/2022-08-26/read-fed-...
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
"The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers."
He is deliberately engineering a recession to reduce aggregate demand. With luck, the recession will be soft. The goals are reducing labour cost inflation via reduced hiring and increased layoffs, which then leads to reduced consumer price inflation via reduced consumer spending due to budget constraints and negative sentiment. Standard macro 102.
I'm sure if he could increase labour supply via monetary policy, he would. But he can't, so reducing labour demand is the plan.
In a way it kind of looks to me like we have reached peak population, at least in the US. Every generation hereafter will have a workforce equal or less than the current in size. That is, unless birth rates change or immigration is allowed on a larger scale.