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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (257554)	6/30/2010 12:26:56 AM
From: neolib	Read Replies (2) \| Respond to of 306849

I agree completely with you that increasing debt means you are artificially boosting GDP by borrowing, hence growing your economy at the expense of the future. I disagree that deleveraging implies a recession. If you do it slowly enough you can keep positive growth, at the expense of lengthening the cycle. My comment was not about the above, its about the need to look at additional aspects of debt. The magnitude of outstanding debt does not give the entire picture, it can vary significantly. A HS kid who did volunteer work for my wife is a classic example. This girl bought a used Neon (2-3 years old IIRC) based on the following logic: 1) Price was attractive (i.e. low total debt, because it was going to be 100% financed). 2) Dealer crafted financing which resulted in low monthly payments (i.e. it was very affordable). What didn't enter into her thought process was the total cost of paying off this debt, i.e. interest rate, and the impact of low monthly payments on total interest paid. She in fact had no clue what either of those were. She didn't care. The sticker price was the price as far as she was concerned, and the only thing that impacted her was the monthly payments, which the kindly car dealer had magically made affordably low for her! I don't recall the exact figures, but when I worked it out for her, she was shocked (likely nearly 2x). This deal was funded by her flipping burgers at McDonalds. Said girl took 5 years to go through HS in "special ed" most the way, and BTW, thought "special ed" was some sort of privilaged category. IMO, the total cost is way more important than the magnitude of debt.