Socialism vs capitalism

[Chacmool]

Remember "Baghdad Bob?" Rudolph Hess? The website you lead us to is just that, a propaganda site. Remember this axiom: Everything you find on the internet is not truth.

Your data may have been correct... I just couldn't stomach the Socialist propaganda surrounding on the reat of the site.

:eek: There's a difference between "Everything you find on the internet is not [the] truth." and "Not everything you find on the internet is [the] truth." The former incorrectly implies that everything on the internet is a lie, while the latter more accurately implies that there are certain false statements on the internet. Be careful with your syntax!

 

:eek: Also, an axiom is "An accepted statement or proposition regarded as being self-evidently true." (source: Oxford dictionary) Your statement is actually an opinion, and certainly not self-evidently true. At the very best it might be a widely-held belief, but it is not an axiom. Be careful with your semantics!

[nkt]

It is convenient that you have underlined what is unclear to you.

I didn't underline anything.

 

Banks make money by lending at a rate higher than their cost. They borrow money at a mix of rates, incur adminsitation costs, and then reloan the money. The difference is their margin. My daughter borrows money at the bank rate, buys a house that appreciates faster than the bank rate, and the difference is her margin. I am not wondering whether I am correct on this.

Yet you are demonstrating that you don't fully understand it. If your daughter pays the loan off at the standard rate, she will maximise her expenditure. If the house goes up in value, so what? Since she will probably want a larger, better, and hence more expensive place in future, she is, in fact, making less money than she otherwise would, and paying more to the bank at the same time. The faster she clears the loan, the less compund interest she will pay, and the larger the percentage of the value of her house will be hers when she sells. Of course, the longer she leaves it, the more expensive the new place will be, too, so the actual dollar gap (as you assume house prices rise faster than inflation) will be bigger.

 

 

They did. Now you are arguing against your own case. The initial calculation by the lender for any loan always includes not only the cost of capital (i.e., their cost of loaned funds) but also the risk of default. No one would loan if the risk of default is 100%.

Except for governments, who do this sort of loss-leading for influence every day. 'We' give $100 million at 3% because the USSR will too, and 'we' didn't want the commies to win! No-one cared about what was going to happen, as long as it stopped the terror that was communism from happening!

 

If the lenders forgive these loans, they will very probably have lost money (net) overall on the deal(s).

But like I say, the governments didn't loan specifically to make money from the loan, they loaned for influence, and the money and power that came with that.

I give up. No one is forcing anyone to do anything except honor their contracts. If they default, no one will ever loan to them again.

But they did. And still do! We aren't talking about a house here, we are talking about big money houses.

 

And the fed does not borrow dollars. I don't know why you keep repeating this.

It uses the securities it buys as assets to offset the cost of buying them in the first place.

I expect my daughter to repay her mortgage. If she does not, I expect he to lose her home. That is the deal. That is what a mortgage is. She is not entitled to a home. She bought one with debt. If she can't honor the deal, she should lose the asset. That is the way ethical people relate across an ethical contract.

But a bank cannot take possession of a country, and all the people in it, to sell to another. It might be interesting if they did, however...

[Biochemist]

Yet you are demonstrating that you don't fully understand it. If your daughter pays the loan off at the standard rate, she will maximise her expenditure. If the house goes up in value, so what?

I am only going to give this one more shot.

 

It would be useful if you would admit that you do not understand how this works. You certainly don't.

 

Let me detail a simple example for you. This one is simplified and leaves out taxes, maintenance costs, real estate commissions, etc, but you will get the idea.

 

1) A buyer has $10,000.

2) He buys a $210,000 house.

3) He borrows $200,000 at 5% to complete the purchase.

4) The house appreciates at 7% per year

5) at the end of 3 years the buyer sells the house.

 

The buyer now has his original $10,000 PLUS about $17,000 in gains (Apppreciation at 7% net of intersest paid at 5% over 3 years) or about $27,000.

 

"Paying off" the loan to "decrease cost" was not an option. The buyer did not have that money. If the buyer wanted to make more money, he would have used a BIGGER LOAN and bought a BIGGER HOUSE assuming he qualified for it. (another topic).

 

On the topic of loans to African nations, many of those loans are not from governments. They are from private banks. Those banks made loans at rates commensurate with assumptions that the lonas would be repaid. The banks have costs. If the US (for example) wanted to "forgive" the debts to African nations, the US would have to pay off private banks. I do not know what fraction of debt to African nations is public versus private sourced. Again, how is this not identical to giving them money???

[Biochemist]

It {the Fed} uses the securities it buys as assets to offset the cost of buying them in the first place.

Huh?

 

It is clear you do not have a clear understanding of what the US Federal Reserve does. If you would like to start a thread on this topic, please do so.

[Skippy]

:eek: There's a difference between "Everything you find on the internet is not [the] truth." and "Not everything you find on the internet is [the] truth." The former incorrectly implies that everything on the internet is a lie, while the latter more accurately implies that there are certain false statements on the internet. Be careful with your syntax!

:eek: Also, an axiom is "An accepted statement or proposition regarded as being self-evidently true." (source: Oxford dictionary) Your statement is actually an opinion, and certainly not self-evidently true. At the very best it might be a widely-held belief, but it is not an axiom. Be careful with your semantics!

:eek: :D The worst part of these forums is the time and bandwidth people waste in not addressing the points in a post, but finding fault with spelling and other grammatical error. :eek: :eek:

 

I will pass my future posts through an editor so that you will no longer be distracted from the actual issue in the post.

[Skippy]

The counter to that axiom is that you will find a lot of truth on the internet you won't find elsewhere!

I'll ditto that point. In fact, I thank God daily for the internet since we can no longer count on CBS, ABC, NBC, CNN, The NYTimes, etc. to give us the truth. If not for the internet, ignorant people would have believed Dan Rather. If not for the internet, ignorant people would have believed John Kerry's statements about his war record. Again, Thank God every day for the internet.

 

But be careful, or you may find yourself reading some socialist propaganda from George Soros or Michael Moore. :eek: As I said, not everything on the net is truth.

[nkt]

I am only going to give this one more shot.

 

It would be useful if you would admit that you do not understand how this works. You certainly don't.

We will see.

 

"Paying off" the loan to "decrease cost" was not an option. The buyer did not have that money. If the buyer wanted to make more money, he would have used a BIGGER LOAN and bought a BIGGER HOUSE assuming he qualified for it. (another topic).

Perhaps the person would have looked at the maths and drawn a different conclusion to you? I would rather a smaller mortgage that gives me a safety net if the interest rates rise. Therefore, it makes far more sense to take out a lower mortgage and overpay. This reduces your total interest repayments. Since your money in the bank is earning interest at a lower rate than your mortgage is, you would be wrong to try to save that money.

 

Now, if you are at your limit, and the rates go up, you lose your house, and the money that you already paid out, interest and all, goes with it. If, however, you are overpaying, you are able to overpay less, and maintain the minimum payment you require. Also, you might finish your repayments before the rates rise, since, if you pay back double, you can repay a 30 year loan in something like 10.

 

When rates rise, prices fall (or grow less rapidly) and so you can then afford a bigger house than otherwise.

 

Now, back to the other point.

Let me detail a simple example for you. This one is simplified and leaves out taxes, maintenance costs, real estate commissions, etc, but you will get the idea.

 

1) A buyer has $10,000.

2) He buys a $210,000 house.

3) He borrows $200,000 at 5% to complete the purchase.

4) The house appreciates at 7% per year

5) at the end of 3 years the buyer sells the house.

 

The buyer now has his original $10,000 PLUS about $17,000 in gains (Apppreciation at 7% net of intersest paid at 5% over 3 years) or about $27,000.

You forgot point 6, which is that they are now homeless!

 

To stop this, they buy another house. This new house is the same as the other, but twice the price, and has gone up by 7% a year. In real terms, that bigger house in now 2% more expensive than before.

 

That is: $210,000 -> $256,200 with a rise of $46,200

The bigger house is now at $420,000 -> $512,400 (up by $92,400)

 

So that handy $27,000 goes into the difference, and, Lo! we have a $65,400 deficit! More than half! How can this be? Simple economics, my friend.

 

Another factor. The bulk of the money from the transaction repayments over a short 3 year loan taken out over a much longer 30 year period went to the bank as interest. It barely touched the original loan amount. After three years, you will normally be paying back as much or nearly as much as you originally took out as a loan, and sometimes more! That is something most people miss out on.

 

And don't even ask about endowment policies! Again, you want to overpay in the short term, as the cumulative interest really, really helps you in the long run. The earlier you can overpay, the longer that cumulative interest builds, boosting your endowment at the end of the term massively.

 

Compound interest is a powerful thing.

[Biochemist]

You forgot point 6, which is that they are now homeless!... So that handy $27,000 goes into the difference, and, Lo! we have a $65,400 deficit! More than half! How can this be? Simple economics, my friend.

I picked a simple example where the buyer held the hoouse for the years and netted an additional $17,000. Obviously, the buyer could have retained the home and continued to accrue a gain.

 

In your model, the buyer netted nothing. You are apparently suggesting that it is better to make nothing because you will not be tempted to make even more money later.

 

Best of luck in your career. I sincerely hope it is not in finance.

[nkt]

Obviously,k the buyer could have retained the home and continued t accrue a gain.

Yes, they could. And what you don't seem to get is that they can acrue more money faster by reducing the money they lose to interest payments to the bank over the time they are acrueing.

 

If you are trying to make $100,000 from the house, you will do it quicker if you pay out more in the short term, as the dead money that you lose to the bank is what you want to reduce.

 

Let's look at your credit card. If you pay the minimum each month, you pay out the most you can. If you pay back more, you pay out far, far less *in the longer term*. While you still have the goods. By paying more interest, you effectively pay more for the goods - you do understand that, right?

 

It is *exactly* the same for the house. Except that the house will go up in value regardless on resale. The more you pay for it, the less you make when you sell it for the same price at the same time, just like everything else.

[Chacmool]

The worst part of these forums is the time and bandwidth people waste in not addressing the points in a post, but finding fault with spelling and other grammatical error.

Actually, I don't usually correct spelling or grammatical errors, unless they interfere with the point that is being made. However, I corrected your FACTUAL errors because they gave a different meaning to the post. You can't just put words in random places in a sentence without affecting the meaning. And ascribing your own definition to a word gives much more credence to your statement than it deserves.

 

I will pass my future posts through an editor so that you will no longer be distracted from the actual issue in the post.

Sarcasm still doesn't change the fact that you were wrong.

 

As I said, not everything on the net is truth.

:eek: Actually, this is what you originally said:

 

Everything you find on the internet is not truth.

[Qfwfq]

Best of luck in your career. I sincerely hope it is not in finance.

Since this argument began, I've been thinking you haven't given the best of advice to your daughter.

 

The only reason I can see Bio, to advise your daughter against paying back more of the debt than the minimum required, would be to the purpose of making other investments at a higher rate than the interest on the mortgage. This assuming also there not being a great risk of the mortgage rate increasing to much, offsetting the advantage of the alternative.

 

The way I see it is that the advantages of owning the house don't depend on how high the remaining debt is. If I need to borrow, in order to buy a house, it makes it more expensive than if I had the money waiting under my mattress. This only offsets the capital investment of purchasing the house. Once I own the house, any money I could pay back but don't, whether it's spent on consuming or even earning, but less than the mortgage rate, isn't giving me a greater advantage than decreasing the debt would.

 

Paying back an extra grand of the debt is exactly like investing it at the mortgage rate. It doesn't detract from the advantages of owning the house.

[Biochemist]

It is *exactly* the same for the house.

Oh. Then perhaps you could explain to me how you make money by buying goods on credit card.

Except that the house will go up in value regardless on resale. The more you pay for it, the less you make when you sell it for the same price at the same time, just like everything else.

Actually, you are almost exactly backwards. Assuming you buy a house at fair market value (or better) the larger a house you buy, the more you make. If you instead elect to buy a house in cash, you would make a far smaller return on a percentage basis.

 

In the above example, the buyer netted a $17,000 gain on an investment of $10,000. If the buyer had purchased the house in cash, he/she would have netted about $47,000 on an investment of $210,000. The first is a return of about 170% over three years. The second is a return of about 23% over three years. Apparently you think at 23% return is better.

[Biochemist]

If you are trying to make $100,000 from the house, you will do it quicker if you pay out more in the short term, as the dead money that you lose to the bank is what you want to reduce.

Actually this is completely untrue. You will make $100,00 FAR quicker, by buying a BIGGER HOUSE on debt. Note again my post above about rates of return.

[Biochemist]

Paying back an extra grand of the debt is exactly like investing it at the mortgage rate. It doesn't detract from the advantages of owning the house.

Exactly correct. But if paying your mortgage is like investing at the mortgage rate (true) then you should buy the largest home you could reasonably afford (on cash flow) because the house itself is a higher return than the mortgage. Ergo, at initial purchase, you maximize gain by maximizing house size.

 

Do keep in mind that the example above was oversimplified, since we did not include other home costs that will often make the above statement incorrect.

 

In my daughter's case, we actually had her buy the house because it was cheaper than renting over 3 years.

[nkt]

Exactly correct. But if paying your mortgage is like investing at the mortgage rate (true) then you should buy the largest home you could reasonably afford (on cash flow) because the house itself is a higher return than the mortgage. Ergo, at initial purchase, you maximize gain by maximizing house size.

 

In my daughter's case, we actually had her buy the house because it was cheaper than renting over 3 years.

Yes, I did the same. I also made money by renting out two rooms, which covered the costs. Not the point, however.

 

If you max out your expenditure, what happens when the rate goes up by one point? Answer: You lose your house, and all the money that was in it. Sorry!

 

I think what we are debating is the difference between the standard model (you) and the Game Theory model (me). With yours, if everything goes perfectly, you make the largest return. However, when things don't quite go perfectly, I win, time after time, while you go bust. Bit like that card game where you stick or twist. Going for 21 every time will not be as successful as going for 21 but stopping at 19.

 

But you are forgetting that this was originally about countries. And, just like people, the value of the countries investments and money flows can go up and down.

 

For these African countries, things did not go well, and they defaulted, or they took out new loans with bad conditions (like the IMF making them switch to a specific cash crop) and then market fluctuations made sure that the moment the maxed out countries had a slight fall in income, they were screwed. Had they pitched lower, and sought to pay less interest over time, they would have been ok.

 

After all, they were hedging the bets that they could make money from the loan faster than the interest would acrue. Just like the hoped for 7% house price growth, year on year. When the "house" values fell through the floor, they were trapped in the equivalent of negative equity, where they were bound by contracts to produce coffee instead of grain, whilst the price of coffee dropped 25% or more over a few years.

[Biochemist]

The snag with that is the level of debt is such that the US still makes more money back from African debt than it gives in aid....

Nkt- I think this is what started the discussion of "making money" off of Africa. I said that no one makes money when they loan at low rates and then forgive the capital. No discussion of game theory has any bearing on the fact that forgiving the debt is

1) identical to giving the debotrs money and

2) results in a loss to the lender.

[Qfwfq]

But if paying your mortgage is like investing at the mortgage rate (true) then you should buy the largest home you could reasonably afford (on cash flow) because the house itself is a higher return than the mortgage. Ergo, at initial purchase, you maximize gain by maximizing house size.

All quite OK, except for the criteria of house size/cost, the housing market is far from simple and proportional.

 

However I was referring to your point about repaying back the same mortgage on the same house (your daughter's case) and not to making a larger investment, which is obviously better as long as it compares well to the mortgage rate. Heck, real estate investment sure isn't simple to predict!

 

In my daughter's case, we actually had her buy the house because it was cheaper than renting over 3 years.

Just as I've been thinking for the past few years, but unfortunately I simply wasn't able to put it in practice before the market shot up, now I've been watching it stagger and settle, I'm ready to proceed when the time seems right! I've seen some comparatively good deals this year, that still haven't sold out, the typical margins for dealing the price should be increasing. When the situation seems to be like that around '98 and '99 I'll put my savings in.