BOE in rate shocker

RenovationMan

Graham_Devon wrote: »

Derv, debt is wealth. Accept it, or understand you need "educating".

However, you can sit there and smile when those suggesting debt is good, are actively going round stating they are overpaying, in the aim of being debt free.

What's actually meant is debt is good if it's seen as a pyramid scheme, and others taking on larger debts behind you can increase your wealth.

Graham, both you and I have borrowed money to buy a house in order to provide a nice home for our respective families. In this regard it can be said that our debt is good because it makes us happy.

However, having that debt also acts as a drag on our finances and so it makes sense, if we have spare financial capacity, to pay it off as quickly as possible. With these low BoE rates, many of us have spare capacity right now and many of us are either paying that money directly onto the mortgage debt or paying it into a savings plan (if it has a better interest rate than the mortgage).

In this respect we can regard our mortgage debt as a good debt and still want to get rid of it ASAP. The two aren't as mutually exclusive as you make out.

Cleaver

DervProf wrote: »

Who is richer, someone with a £1million house with a £1million mortgage, or someone with a £150k house and no mortgage ?

Assume that both people have a bank balance of £2000, the same income, and no other debt.

The reason that the USA is the richest country is because they haven't paid their debt back.

If I go out and borrow £1million today, does that make me rich ?

I think Derv that you have slightly odd concepts about what 'wealth' and 'being rich' means. But I fully concede that these are somewhat abstract concepts.

I agree that just because you buy a million pound house it doesn't mean you're rich or wealthy. But one assumes that if someone has bought a million pound house then they have the cashflow, cash lump sum and general income with which to afford that asset. Indeed, I imagine a 20% deposit would be needed and banks generally only loan 3.5 times income. So, in the real world, our million pound house owner would need £200,000 in spare cash and an income of around £250,000 a year to obtain the loan.

Let's compare this to the person who owns a £150,000 house with no mortgage and who do we think is the 'richer' or 'more wealthly'? Well, I would conclude the person with the million pound house. And this is because I would assume that they have the cash-flow and the economic clout that allows them to access large lines of credit from a bank.

Which of the two is happier? Which of the two is more sensible with money? Which of them has a better attitute to money? These are obviously all different questions.

DervProf wrote: »

Another example. Man Utd are supposed to be the richest club in the UK. They may have the largest income, but what if you balance their books ? What if you sell their assets, and settle their debts. How much would you be left with ?

This is too simplistic a way to look at it, because we don't need to settle their debts and sell their assets because they are solvent. All large companies that are doing well can go in to debt as long as it's manageable.

DervProf wrote: »

To me, being "rich" means that you have your own money in your own bank account.

Fair enough, but I still think 'rich' and 'wealthy' are far too abstract concepts to simply decide that the richest person is the person with the most cash in their bank account. The person with the most cash in their bank account isn't necessarily the most anything, they are just the person with the most cash in their bank account.

Let's say you and I both have £50,000 in our bank accounts. In your eyes we are equally 'rich'. I keep mine in the bank, but you decide to start a chain of shops. You invest your £50,000 and borrow £250,000 from the bank to start your business up. We won't get in to the complicated details, but in your business plan you don't see a profit for the first two years, you then see growth over the third year to break even and start to see a significant profit in years four and five and then onward. Let's say this happens, and by year six you've expanded, are making a significant profit and are able to double the size of your retail empire by borrowing even more from the bank. My £50,000 is still in the bank, but I have no debt.

Who is 'richer' or 'more wealthy'? You could do a scientific approach and look at debts vs assets, but you always knew in years one and two that you'd look poor in this respect. But that didn't mean you were insolvent, it meant that you had a long term plan and took on a debt you could manage. By year six I think you would be the richer and more wealthy person, but you achieved this through good debt. And you're still in a lot of debt, and still have the risk that your business goes t*ts up and you lose it all, indeed, don't all business owners have this risk?

There's no answer to this, I'm just pointing out that having cash in the bank is one way of calling someone 'rich', but it's a bit of a blunt measure. It's the reason Manchester United are called one of the richest clubs in the world yet still posted a loss in 2010. It just isn't as simple as you're making out.

DervProf

Cleaver wrote: »

There's no answer to this, I'm just pointing out that having cash in the bank is one way of calling someone 'rich', but it's a bit of a blunt measure. It's the reason Manchester United are called one of the richest clubs in the world yet still posted a loss in 2010. It just isn't as simple as you're making out.

I was using a blunt measure to try to find out if, as stated previously, the USA can be regarded as the richest country in the world. To judge this, you have to have parameters to compare contries. As of today, now, if you want to compare the wealth or "richness" of any country, organisation, or individual, you need to look at where their finances stand now, not what they might be next year, or in 5 years time. Who knows how the finances of the USA or Man Utd will be in 5 years time, all we can look at is now. I think it would be fair to take into consideration current income, expenditure and asset values. However, there is a problem with asset values, because you might consider a country's property to be an asset, but as we have seen in the States, the value of property can be artificially inflated, and can change quite dramatically.

The reason I made these points was to question the view that the USA is the richest country in the world.

Sibley

Rates are going nowhere for years.



http://www.express.co.uk/posts/view/252047

RenovationMan

Cleaver wrote: »

I think Derv that you have slightly odd concepts about what 'wealth' and 'being rich' means. But I fully concede that these are somewhat abstract concepts.

It's all about whatever makes you feel happier. We have short lives and one spent hoarding wealth would make one person happy because of the need to be secure financially (this was the driving force behind Scrooge, pre-ghost visit), whereas some people want to spend their money on travelling, material possessions or helping others (the driving force behind Scrooge post-ghost visit). The majority of people are somewhere around the middle, saving a bit, spending a bit and no worrying too much about their manageable and necessary debt. I guess I'm in this latter.

Kohoutek

DervProf wrote: »

I was using a blunt measure to try to find out if, as stated previously, the USA can be regarded as the richest country in the world. To judge this, you have to have parameters to compare contries

Yes, but the parameters to judge countries aren't the same as the parameters to judge individuals and the parameters to judge corporations aren't the same as ones to judge countries or individuals. You have a very simplistic view. Stop listening to people like George Osborne who thinks government debt is like credit card debt - he hasn't got a clue.

DervProf

Kohoutek wrote: »

Well you seemed pretty opposed to debt of any kind. I was beginning to suspect you might be "debtistheft".

If you have stopped suspecting that, then you would be right to have done so.

Or would you ?

BTW. It may seem that I am opposed to any kind of debt, the fact is that I am not. Personally, I would, and indeed have borrowed money to buy a house and buy a car. The only time I would borrow money for anything else would be in an emergency (say a boiler or roof replacement), if I had not got the money saved. Borrowing for "luxuries", such as large screen TVs, conservatories, holidays etc would not be something that I would consider. I would save up for those things. If I couldn't save for them, I wouldn't buy them.

On a national level, I think New Labour blew it. Yes, everything looked rosey, but we have now found out that a large debt was left behind (along with continued increases in that debt). "The defecit can be reduce by growing the economy" I hear them now say. "Cutting spending won't allow the economy to grow". Well excuse me, Mr Milliband, Mr Balls etc, you claimed to have had healthy growth in the UK during your stay in office, yet you still managed to run a budget defecit. How the **** do you expect the current government decrease the defecit by borrowing more money ? You couldn't do it, but you expect them to.

DervProf

Kohoutek wrote: »

Yes, but the parameters to judge countries aren't the same as the parameters to judge individuals and the parameters to judge corporations aren't the same as ones to judge countries or individuals. You have a very simplistic view. Stop listening to people like George Osborne who thinks government debt is like credit card debt - he hasn't got a clue.

I don't listen to George Osbourne much.

Anyway, is the USA the richest country in the world ?

Kohoutek

DervProf wrote: »

Anyway, is the USA the richest country in the world ?

"Richest country in the world" is an extremely vague, meaningless term, but probably the closest economic measure to the answer I suspect you're looking for is GDP per capita. On that basis, no the USA is not the "richest country in the world", it's Qatar apparently.

Cleaver

DervProf wrote: »

The reason I made these points was to question the view that the USA is the richest country in the world.

As others are pointing out, there isn't really a way to measure this. Your definition of rich seems to centre around two things:

1. How much cash someone or something has
2. What would be left if you sold all the assets of someone or something, paid off debt and then looked at the outcome.

On that basis, I'm not sure of the richest country in the world as I don't think that would ever be a way of measuring it.

In terms of traditional measurements, around GDP per capita or per person then the USA would always be around the top ten. And this is quite impressive as they are up against countries like Qatar, which is the size and has the population of Birmingham but is sitting on eleventy billion tonnes of oil and gas.

I guess all I'm saying is that I'm not convinced that looking at levels of debt is a good way of measuring the wealth or richness of a country. It could, however, be a good measure of whether a country might be f*cked in the future. However, The USA is likely to be okay because of China, as the two kinda depend on one another. China make cheap stuff and American's then buy it. China then buy up American debt and countries. The cycle continues.