Why do people in developed countries still fall into the "debt trap" ?

Dec 2011
4,865
Iowa USA
#21
Public or private dept is an engine of modern economies [it's part of the "financial sector"].

For example Italians tend to save money and statistically we've got money on the current account, not debts [there are Italians with debts as well, buta good majority of us saves money]. This means that the circulating monetary [real or electronic] mass risks to be limited. We are enough lucky that our government keeps on creating a nice enormous public debt ...

In a few words, the private properties of the Italian people value more than the gigantic Italian public debt.
This is a legacy of Thatcher-Reagan era.

As recently as the early 1980s, the banking sector in USA was regulated much more closely. I'm unconvinced that the financial sector is accomplishing it former role as "conduit" of capital for farmers, mineral extractors and manufacturers/refiners. The financial sector now operates for its own expansion and growth per "Darwinist" game theory. A true step backwards for society. (Said the now-sidelined engineer!)
 
Likes: duncanness

tomar

Ad Honoris
Jan 2011
13,755
#22
I agree with much of what you say but there’s a contradiction in the above. For a variety of reasons a car is absolutely essential for some people to get to work. We don’t have enough affordable housing within easy reach of workplaces.
Oh I agree.. But there are cars and cars... Too many people buy cars that are really too fancy for them and thus too expensive....
So no contradictions, the point was, get the housing you can afford and get the car (or no car as the case may be if you have access to public transportation) that you can afford... That porsche might look very good, but it can turn one into a slave if one has average or below average income
 

tomar

Ad Honoris
Jan 2011
13,755
#23
is it better to rent your lodging for twenty years to save the price of purchase ?
or borrows the money and live in the place for twenty years while repaying the mortgage
often after ten years the repayments are much smaller than the rent value .
There is no one answer to this question... It depends on your situation and location

For example if your mortage + costs (taxes etc..) is roughly equal to your rent, then it is generally a good idea to buy, because part of that payment will go towards the principal (thus in effect you save money) IF what you are buying is in a good location.. The property will tend to increase in value over time... Plus if you get "lucky" and inflation starts up again, and you have a fixed interest rate, you may be paying negative interest on your mortgage....

If your mortage is much higer than the rent, and the location is not good, and you might be moving soon, then the deal is not so great....
 
Oct 2009
3,605
San Diego
#24
This is about countries with relatively high standards of living and comparatively high revenue with a significant portion of the population in the middle class

Countries where education is mandatory till the age of 16 and where a majority go on way beyond that.

So in essence, a wealthy well educated population.

The average american for example is estimated to have some $40 000 worth of personal debt (not including mortgages). That would be $160 000 for a family of 4. Way above 1 year of average revenue even if both parents are working

Yet the principles of sound financials for an individual/family are fairly simple, and can be summarized as

1. Spend less than you earn, this include:

  • postpone non essential purchases until you have saved the necessary amount
  • live where you can afford it (so outside expensive areas such as city centers), drive what you can afford
  • avoid non essential expense (restaurants, gadgets etc...)
  • avoid any loans except mortgages .... if for any reason a loan cannot be avoided, avoid high interest loans (including credit cards)... never max out on your borrowing (allow for a possible drop in your revenue)
  • optimize your expenses

2. Always keep a reserve of money for emergencies

3. Optimize (mazimize) your revenue


Not rocket science. Yet a significant number of people fail those basics.

Why ?
That is not actually the winning strategy for families in a capitalist economy.
Intelligent management of debt is the ONLY way for most people to significantly improve their financial position.

e.g.- you have a degree- but no job as yet- you are offered a good paying job, but it is too far away for you to walk and there is no mass transit service that can get you there in reasonable time.
You can, however, get a loan to buy a car- you simply factor that the car payment has to be within your means ( with the new job ) based on your other costs of living... and voila! You are notably better off WITH the debt than you would have been without it. ( as long as you don't lose that job )

Next- Say you hate the idea that your Rent payment is going to buy a property that someone ELSE gets to own. So you want to buy your own home- figuring if you can pay rent for the next 30 years- you can certainly pay a mortgage for the next 30 years.

However- even though you have managed to accrue a down payment- the bank refuses to lend to you because you have carefully lived by the principles you espouse above... it turns out that you have no credit history- and NO ONE will give you a loan without one.
What is a credit history? Its demonstrable proof that you are the kind of person who PAYS his debts when they are due, and with monthly regularity.

What can you do? You have to get credit cards or other loans and USE them to buy things you need anyway- except- you have to be sure that you don't just pay the balance with the first bill... but instead that you pay off the balance incrementally over a number of months or a year. What they want to see is that you CAN pay every month and are comfortable with debt. This is the only way you can establish a good credit history.


In my youth it was pretty hard to get credit. Today- they hand it out like halloween candy. that is because our economy is no longer a manufacturing economy, it is a debt service economy.
And so capital is making it easier to get credit- so they can profit on all that sweet interest. Conservatives cutting spending on higher education so that schools have become reliant on student loans ( these laws lobbied for by the Debt Industry ) has made it so that GETTING that degree that might secure you a better paying job now requires you to start life saddled with debt.

Everywhere we look we are being given the easy opportunity to have the things we want NOW and simply pay for them with our future earnings. Even though we end up paying 50% more for EVERYTHING we buy on time.

This is why mature market economies are heading for disaster... what they are doing is BORROWING from future productivity and PRETENDING that future labor is productivity TODAY. ( Debt service did not used to be factored into the GDP- but banks lobbied to be able to treat debt as a "product". furthering the delusion that we are more productive, when in fact we are stealing money from labor not yet performed. )

Why do people fall into this trap? Because SOME people can play it well and get ahead - leveraging their acquisitions of property and busineses and other sources of income ( your number 3- truly optimizing your income almost always involves leveraging ) And that example leads many into thinking they are clever enough to do the same- even if they aren't and even if they are ignoring how many attempts to leverage wealth fail due to simple bad luck.

And folks fall into it because our entire culture and media landscape has become about consuming- its the only way to keep the economy rolling and so government and the ownership class are constantly encouraging the hoi polloi to go ahead and BUY whatever they want, now.- because at this point, if we all stopped borrowing from future productivity, the world economy would collapse and we would ALL be out of a job.
 

Rodger

Ad Honorem
Jun 2014
6,169
US
#25
Society today, at least in the U.S., is one immediate gratification and a mentality that "I can have it all and I deserve it too." At least it is for many. So, people can get what they want to satiate those needs and then worry about paying for it later. Consumerism encourages this. Many companies are fine with this buy now pay later mentality. Furthermore, at one time it was quite easy for individuals to file for personal bankruptcy. Your credit would be nil for 7 years, but you got to keep all the things you purchased on credit, short of things like a home and auto. I once knew of a man, 20 years ago or so , who filed for personal bankruptcy twice in his lifetime. I am not sure if the personal bankruptcy laws have changed in recent years or not.
 

tomar

Ad Honoris
Jan 2011
13,755
#26
There I want to blame the banks. The value of the houses had risen to completely insane prices. In addition, if you had just a little bit of equity you were bombarded by your bank with offers of loans not just for home improvements but also for consumer loans.
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There is always a tendency to blame others... We are all bombarded by all kinds of offers, banks of course, but everyone from your local supermarket to some tailor in Hong Kong does the same (I kid you not.... got a call the other day from Hong Kong, I was curious so I picked up: it was a guy who started the conversation by telling me that I did not know him - which was true- but that he was going to do a custom suit for me)..... If we accept them, we are to blame, not the guy making the offer....
 

tomar

Ad Honoris
Jan 2011
13,755
#27
That is not actually the winning strategy for families in a capitalist economy.
Intelligent management of debt is the ONLY way for most people to significantly improve their financial position.

e.g.- you have a degree- but no job as yet- you are offered a good paying job, but it is too far away for you to walk and there is no mass transit service that can get you there in reasonable time.
You can, however, get a loan to buy a car- you simply factor that the car payment has to be within your means ( with the new job ) based on your other costs of living... and voila! You are notably better off WITH the debt than you would have been without it. ( as long as you don't lose that job )

Next- Say you hate the idea that your Rent payment is going to buy a property that someone ELSE gets to own. So you want to buy your own home- figuring if you can pay rent for the next 30 years- you can certainly pay a mortgage for the next 30 years.

However- even though you have managed to accrue a down payment- the bank refuses to lend to you because you have carefully lived by the principles you espouse above... it turns out that you have no credit history- and NO ONE will give you a loan without one.
What is a credit history? Its demonstrable proof that you are the kind of person who PAYS his debts when they are due, and with monthly regularity.

What can you do? You have to get credit cards or other loans and USE them to buy things you need anyway- except- you have to be sure that you don't just pay the balance with the first bill... but instead that you pay off the balance incrementally over a number of months or a year. What they want to see is that you CAN pay every month and are comfortable with debt. This is the only way you can establish a good credit history.

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Not necessarily disagreeing, but note that "credit history" is not a thing in every country... In many european countries it does not exist or at least not to the extent of the states... In the US as you point out you can play the system, without really getting into debt just to get a good credit score, so that when you do need a loan (e.g. a mortgage) you get it at best rates...

Re your car example. I did say to avoid loans (except mortgages) wherever possible... If it makes financial sense, why not... But in that example you'd either buy a cheap car (it just needs to get you from point A to point B) or perhaps consider a lease....
A mortgage is a different kind of loan.... It is different because normally -if you do not own real estate- you have the expense of rent in any case.... However the mortage should make sense in light of your current rent, and other factors (such as location of the property, your expected stay there, the price of the property etc...)

Another thing I should have added is : Do not gamble.... in the broad sense... it is not only about going to casinos or playing poker online.. It is making dubious investments and going for "get rich quick schemes" most of which backfire and get you poorer: this includes stuff like bitcoins (sure you COULD get lucky, but so could you at Vegas), buying overvalued property, buying stuff you dont understand etc....
 

tomar

Ad Honoris
Jan 2011
13,755
#28
Because debt provides the benefit/gratification immediately while pushing the cost into the future it is enticing for decision makers who are either optimistic about their ability to repay that debt later or heedless about its downstream implications.

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True, but once you have gotten hit over the head a few times, should that not (pavlovian principle) change the attitude ?

Like, you bought that super duper 4K giant TV that barely fit in your living room and now you cannot make rent... Just the stress of that situation should be an incentive NOT to buy the super couch, made of pink unicorn leather that will make your neighbours jealous ?
 
Oct 2009
3,605
San Diego
#29
Society today, at least in the U.S., is one immediate gratification and a mentality that "I can have it all and I deserve it too." At least it is for many. So, people can get what they want to satiate those needs and then worry about paying for it later. Consumerism encourages this. Many companies are fine with this buy now pay later mentality. Furthermore, at one time it was quite easy for individuals to file for personal bankruptcy. Your credit would be nil for 7 years, but you got to keep all the things you purchased on credit, short of things like a home and auto. I once knew of a man, 20 years ago or so , who filed for personal bankruptcy twice in his lifetime. I am not sure if the personal bankruptcy laws have changed in recent years or not.
your phrasing, like that of the OP, makes this sound like the result of a personal failing. The Mentality of the people.
That is the narrative the rich would like everyone to believe, rather than realize that the powers that be are Driving people to have no other choice in living their lives.

In fact- this is how our economy works and the ownership class and political leadership actively encourage and manipulate the citizenry into behaving in this way.
No other viable option is presented nor available.

When they tout the growth of jobs numbers- they are celebrating their success in getting people to incur debt. Real inflation adjusted wages have not risen for the working class in over 25 years in the US and most of Europe.
ALL 'increases' in productivity have actually been productivity borrowed from future labor in the form of interest payments on last year's borrowed labor.

Its a scam- but its a scam we can not escape from because the minute people stop spending money they don't have yet- swathes of their fellow citizens get laid off- which means fewer people who can afford to spend money- which results in more layoffs.
and you end up in a convergent series- like in 2008-2009. The only way that was stopped after 2008 was thru extending the wars in the middle east so that All those soldiers ( half of whom were reservist's whose jobs had disappeared ) continued to have a government paycheck.

The crash of 2008 was initiated by a spike in GAS prices.
2001 started off with the recession of the burst dotcom investment bubble ( itself a product of deregulated banking and IPOs- encouraging ever more risky investment speculation ) The government, in trying to make the economic numbers look good further reduced the banking regulations and pretty much gutted the SEC. This was an attempt to spur house purchasing and, thereby home building because it takes ten million iphone sales to make the same impact on GDP as just a few thousand house sales. Thing is- everyone who could qualify for a loan had already bought a home.- so the only way to spur 'growth' was to make it easier to borrow more money, with less down, and approve folks who would not have been approved previously. The only way to do this was for Banks to be allowed to have smaller reserves in comparison to their leverage- and the government deregulation efforts allowed this. So a lot of folks who were barely getting by were told that this was their golden chance to get their foot in the door of home ownership- traditionally the best investment for the working class. ( and a bunch of would be property tycoons used the easy money to try and leverage a real estate empire - and THAT speculation resulted in inflated housing prices that could not be supported by increasing incomes )
The government followed this by de-regulating ENERGY trading. This resulted in ENRON and significant inflation in the costs of electricity- further stressing those homeowners who could barely make their mortgages already.

All those SUV driving folks who had bought homes thru deregulated mortgages- and all those wannabe real estate tycoons were THEN hit with the government deregulating OIL trading. Despite a worldwide glut in oil supply- this resulted in market manipulations that abruptly doubled the price of gasoline in 2007.
Suddenly the overstressed working class was hit with a choice of being able to pay their mortgage- or being able to fill their gas tank so they could get to work.

They started defaulting on their mortgages, and the entire house of cards of an economy based on future labor came crashing down as layoffs caused a lot of that future labor to evaporate.

But the ownership class not only got the working class to pay off the losses created by their own mismanagement and their own lobbying for less regulation... they also got to buy up all those peoples' homes for pennies on the dollar- the single largest transfer of wealth from the working class into the hands of the 1% in human history - As government bailouts gradually got the economy rolling again- all those folks whose homes had been seized - and all those folks whose retirement investments had been destroyed were now paying rent to the new owners of the foreclosed properties. Still paying off mortgages with their future labor... just someone else's mortgages.


you can not say Today's folks have an attitude of wanting it all, now... without pointing the finger of blame at the people RIGGING the world so that that is the only way to live.

You have to have a smart phone to operate in the modern world. You sign a contract to pay for it over time.
You have to have a car.
You have to have a wardrobe.
You Have to buy gas to get to work, even if you ran out of money because of an unexpected cost like injury or sickness.

And moreover- if just 10% MORE of your fellow citizens chose to live a life where they never incur debt- then there is a good chance the ripple effects of that action could mean losing your job.

Today- the Super rich have pretty much destroyed democratic rule of law- they now unashamedly bribe politicians and manipulate your access to information and divide public opinion so that the electorate can not form any consensus of action that might impinge upon their kleptocracy.
They have convinced people that government BY the people can not be trusted, and that corporations do everything better. They have gotten the working class to blame Taxation for their woes- rather than the fact that the ownership class REFUSES to increase your real pay for a over a generation, and does everything they can to slap a massive profit AND interest payments on every good or service you require to keep on working to pay them rent and buy the things they have made necessary to a career.

Its not people's attitudes.

We are ALL being played by the emergent properties of the avarice of the 1%.

welcome to SURFDOM 3.0
 
Nov 2018
345
Denmark
#30
There is always a tendency to blame others... We are all bombarded by all kinds of offers, banks of course, but everyone from your local supermarket to some tailor in Hong Kong does the same (I kid you not.... got a call the other day from Hong Kong, I was curious so I picked up: it was a guy who started the conversation by telling me that I did not know him - which was true- but that he was going to do a custom suit for me)..... If we accept them, we are to blame, not the guy making the offer....
I agree, you are responsible for your own actions. And ignorance is no excuse for behaving foolishly.
However, I had a colleague; her and her boyfriend bought a house and lacked furniture, when I said something about a recycling shop. She just smiled and said that the bank had said their monthly repayments would not be that much higher if they lent the money to the furniture.
I was just speechless; you will still have to pay for the furniture when it have ended up at the landfill. And she looked at me like I was the stupid one.
Of course, a bank is a business that is going to make money one way or another.But there must be limits.
Danske Bank has by the way just been reported to the police to mislead customers about an investment product. So, fortunately, the law obviously puts limits on how much banks are allowed to mislead customers.
 

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