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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: GST who wrote (76809)	1/24/2007 9:45:27 PM
From: GraceZ	Read Replies (2) of 110194

Sorry for the long delay in responding. I'm working on a book project and it is all consuming. Americans approach life as a cash flow proposition -- how much does a house cost? It is a matter of the monthly payments. Yes, they do and being cash flow oriented has given them a very high average net worth in comparison to the rest of the world. My point is, being cash flow oriented hasn't hurt them in terms of net worth. Borrowing has allowed them to leverage their savings to build up net worth faster. You act as though using your own money doesn't have a cost. Money has a "monthly" cost regardless of whether it is yours or someone else's. Say you invest 300k cash in a house, the "payment" in this case is the return you would have gotten from using that money somewhere else. Someone who pays cash for a house or car is making a monthly payment regardless of whether or not they realize it. Cost, in economic terms, is what you could have done with the money or resource. Using one's own savings to buy a house may in fact have a much higher cost than using borrowed money. When Americans overwhelmingly choose to use borrowed money to pay for housing it is because the cost is lower to borrow than to use their own capital. Especially so when they use their savings to invest in some other wealth building activity like a business or some other income producing investment. When you can get 10-20% compounded return on your investments while paying 5% to use someone else's to buy a house it makes little economic sense to use your own money to pay for the house. The one possible exception might be to put cash in a house as a replacement for fixed income investments which pay a low risk free rate of return. Maybe the Chinese use their own cash to buy cars and houses because they have fewer opportunities to invest their savings for higher returns. You would probably not recognize life in a society where people buy almost everything for cash -- little or no credit. I've traveled to lots of poor countries. Most places on the planet where ordinary people don't have access to bank lending are extremely poor.

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