Lion of the Blogosphere

People buying vacations on credit

with 57 comments

Article at Marketwatch about new finance companies like Affirm which allow people to buy all sorts of crap they don’t need on installment plans, with usurious rates of interest.

The article provide a quote from a “financial expert”:

Still, financing a vacation is “a terrible idea all around,” Podnos said. “It’s one thing to finance your education or home purchase, or even a car purchase in some situations … but to finance a vacation is to me just insane. If you can’t afford to pay for your vacation out of cash on hand, don’t take a vacation.”

But it doesn’t go far enough. This is why we need laws against usury. Not only to protect the proles from themselves, but too many proles leveraged up to their eyeballs increases the riskiness of the entire economy and can lead to severe recessions or even depressions. And that’s true even when proles lever up to buy more worthwhile long-term assets like houses and college degrees. Well, a college degree isn’t an asset because it can’t be sold.

This is an example of where the libertarian model of economics fails.

Written by Lion of the Blogosphere

June 21, 2018 at EDT am

Posted in Business, Economics, Proles

57 Responses

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  1. indeed. in his autobiography the nobel laureate in econ stigler said, “laws against usury injure the poor.”

    not kidding. look it up in Unregulated Economist.

    at that point i realized lots of economists had autism and maintained their academic posts because of it, not in spite of it. libertarianism is a mild form of autism.

    icelandic phallological museum

    June 21, 2018 at EDT am

  2. The libertarian model of economics assumes all people have the IQ of the average person running around in libertarian circles which I guess would be around 115 to 120.

    everybodyhatesscott

    June 21, 2018 at EDT am

    • It seems to me that even people with IQs of 115 get sucked into going into debt to pay for vacations, in order not to feel left behind because everyone else is going on vacations.

      Lion of the Blogosphere

      June 21, 2018 at EDT am

      • Who’s the real idiot, the prole blue-collar worker taking advantage of available loans, or the SWPL banker lending money to people unlikely to pay it back?

        njguy73

        June 21, 2018 at EDT pm

      • The prole who pays taxes to bail out the banker and still have to pay his loan back over many years or confiscation of his property.

        Hashed

        June 21, 2018 at EDT pm

      • The prole is the idiot, because his credit will be ruined and he might see a garnishment in his wages, which often includes interest and attorney fees. The SWPL banker is doing his job, and bad debts are a write off against profits.

        JS

        June 21, 2018 at EDT pm

      • Cancellation of debt is a taxable event, so an unpaid credit line of more than $10K will be forgiven and then taxed, unless one declares insolvency, which is hard to prove for individual consumers.

        JS

        June 21, 2018 at EDT pm

    • The problem is with the IQ of the reporters.

      Lion is clutching his pearls demanding we pass ursury laws now! today if possible! But the reporter couldnt even come up with one negative story about this ‘trend’. “Denise Phillips, a military veteran and mom ” wanted to take a trip. So she paid over time. Big deal.

      And she is planning another trip in January! Will no one intervene to pass law to stop her. We dont even have a single entry in the parade of horribles.

      If you have terrible credit you could pay up to 30%. Big deal- that what you’d pay with a credit card if you are a sucky slow pay. From the Affirm faq it looks like the expected APR is more like 20%.

      Lion o' the Turambar

      June 21, 2018 at EDT pm

      • I am sure that if the reporter put some effort into it, he would find someone who went bankrupt because of this.

        Lion of the Blogosphere

        June 21, 2018 at EDT pm

      • According to her timeline she sent out a tweet the day before the story was submitted. Thats what passes for research
        “Hello Twitter. Maybe a long shot: Do you know anyone who has paid for a vacation in installments?
        Clarification: Especially a vacation or other travel they couldn’t have afforded otherwise”

        So I question how big a cataclysm this really is.

        Lion o' the Turambar

        June 21, 2018 at EDT pm

    • “The libertarian model of economics assumes all people have the IQ of the average person running around in libertarian circles which I guess would be around 115 to 120.”

      No, it doesn’t. It looks at the individual person, and specifically designs communities/contracts for the low IQ.

      In general Natural Right drives ‘everyday economics’ in libertarian thinking, not the reverse which is neo-classical liberal/marxist thinking. To be fair, they use another sense of economics as household management and a third as a branch of ethics/systems theory.

      IMHO the problem with usury statutes is they’re over-broad. Unfair contract is enough to handle those who don’t understand the implications. As they say, ‘know your customer’…

      Robert

      June 21, 2018 at EDT pm

  3. The only asset that should be financed is rental real estate. This is due to the power of leverage and the tax benefits. Literally every other asset class, including primary residence, should be bought in cash. Of course, this is not realistic for most people, but it is the best way.

    B.T.D.T.

    June 21, 2018 at EDT am

    • What tax benefits? The interest deduction is only available for primary residence.

      bobbybobbob

      June 21, 2018 at EDT am

      • Expense write offs and depreciation. Why do you think Trump doesn’t pay any federal income taxes?

        B.T.D.T.

        June 21, 2018 at EDT am

      • If it’s a rental property, interest and property taxes are written off on the Schedule E (Supplemental income and loss) and aren’t affected by the new tax law. Personal residence interest and property taxes go on schedule A (Personal Itemized deductions) and most people won’t itemize with the new standard deduction.

        everybodyhatesscott

        June 21, 2018 at EDT pm

      • It’s still only of benefit to use debt leverage if you think the asset itself will appreciate at rates above interest expense. Or you get some non-recourse loan such that you can walk and stiff the bank if it goes badly.

        Trump’s trick was that he kept almost blindly doubling down on commercial real estate in a very historically abnormal period that worked in his favor, not that he found some tax loophole. Contrast Trump with Sam Zell, who didn’t just double down over and over, but sold at tops and sometimes went short.

        bobbybobbob

        June 21, 2018 at EDT pm

      • None of that is correct.

        The proper way to determine the value of real estate or any project is to calculate the net present value of real estate using the discounted cash flow model. You assume an all-cash or equity purchase and discount the projected cash flows according to what your investment could make in an alternate investment of similar risk, like a stock market return.

        Only after you’ve done this do you focus on the financing.

        You never estimate these cash flows based on the interest that you are paying for debt. That is incorrect. This is because the cost of your capital is not the rate of interest. Investment and financing decisions are always separate.

        map

        June 21, 2018 at EDT pm

    • usually true, but margin rates (at least at ib) are so ridiculously low right now (especially outside the US) you’d be a fool not to use margin…and put some money in a taxable account…as IRAs only allow leverage in futures.

      icelandic phallological museum

      June 21, 2018 at EDT am

      • I guess it depends on your risk tolerance. I would much rather borrow to leverage up commercial real estate holdings than stocks. With stocks you are one downturn away from catastrophe.

        B.T.D.T.

        June 21, 2018 at EDT am

      • “The proper way to determine the value of real estate or any project is to calculate the net present value of real estate using the discounted cash flow model. ”

        Yup, commenter map is correct. Typically in practice you take the verified rents for 10 months to account for vacancies, bad tenants, etc, then multiply by 6 or 7 to get the ideal worth, discount for condition– then to the bargaining table!

        You do look to see if those rents will give you your target cash flow. If they don’t, you adjust accordingly and–to the bargaining table!

        Robert

        June 21, 2018 at EDT pm

  4. Many Meriproles rack up on credit cards for restaurant bills. Is this any different?

    JS

    June 21, 2018 at EDT am

    • Exactly, anybody who runs up credit card debt to pay for a vacation is taking out a loan. I agree that laws should protect against fraudulent loans, but at some point you can’t protect people from their own bad choices without turning society into a sheep pen.

      ice hole

      June 21, 2018 at EDT pm

    • Yes. You can pay off your restaurant bill at the end of the month and pay minimal interest.

      Tarl

      June 21, 2018 at EDT pm

  5. The “psychology of belief” espoused on social media to susceptible young people is that “experiences” trump buying things. Also, they are socially brainwashed that a BS degree to nowhere is worth going into debt for more than $40k. I wonder who benefits from these memes!!

    cesqy

    June 21, 2018 at EDT am

  6. A truly libertarian model allows the weak buffalo to die off from the herd. We’re a welfare/Medicaid/bailout country so we keep the weak buffalo in tow. Charity may exist but it’s not the responsibility of the state.

    Baron

    June 21, 2018 at EDT am

    • I’d rather invest in schools than spend money on prisons. The reality is the weak will not die off in a modern economy; they’ll manage to subsist and breed — even if you eliminated the welfare state. The people of Wal-Mart shall inherit the earth.

      Vince

      June 21, 2018 at EDT pm

  7. First, payday and car title loans may seem usurious, but I’ve seen people breaking down the effective interest people pay when they deal with conventional banks. They do even worse because of overdraft and late fees. Broke people sometimes need credit, can legitimately use it, and the only way it’s possible is at very high rates of interest. The moral case isn’t as cut and dry and you pretend.

    The other aspect is you can’t easily separate out monetary policy from this stuff. If you could get 5% in a savings account and these consumer loans cost 10%, behavior would be very different. Instead saving is nearly pointless. The incentives are all horrible and geared to running up asset prices for the rich.

    bobbybobbob

    June 21, 2018 at EDT am

  8. “This is an example of where the libertarian model of economics fails.”

    No. High interest rates compensate lenders for taking on risky loans. High interest rates also discourage borrowing in the first place. Then when irresponsible low-IQ NAMs inevitably default en masse, the fakestream media call white people racist until Uncle Samantha pays off the risky loans with freshly-printed greenbacks.

    That last part is not classical libertarian economics. Libertarians don’t believe that losses should be covered by responsible, risk-averse white people.

    Libertarian economics are not compatible with NAMs.

    hard9bf

    June 21, 2018 at EDT am

    • Libertarian ism is incompatible with reality.

      NotWesley

      June 21, 2018 at EDT am

  9. too many proles leveraged up to their eyeballs increases the riskiness of the entire economy and can lead to severe recessions or even depressions.

    because the supposedly non-prole clever people lending them the money (allowing this eyeball leveraging) are actually prole and not clever.

    icelandic phallological museum

    June 21, 2018 at EDT am

    • Businesses only care about the next quarterly financial statement and not the long-term viability of the business model.

      Lion of the Blogosphere

      June 21, 2018 at EDT am

      • The Supreme court picked new economic winners today with their sales tax correction made decades ago. Maybe post President Trump, they’ll pick new winners in the sex orientation, religious, and abortion issues they decided in the past.

        cesqy

        June 21, 2018 at EDT am

      • “Businesses only care about the next quarterly financial statement and not the long-term viability of the business model.”

        Meh, I see what Lion is trying to say but I would be careful here. Only (in general) when forced to do so by statute (as happened in 2008 with the sudden ‘mark to market’ requirement) or when run by bozos who think libertarian economic insights are wrong. A concept in libertarian economic approaches is be careful about over-generalizing and legalities of terminology, hence most received economic models and predictions on what businesses do vs. what they actually do are wrong.

        Most businesses only do that in Marxist-world or when pressed to do so by statutes to ‘correct’ over-valuation that doesn’t meet their swarmy regulatory economist models to create a ‘capitalism’ they can criticize. The same long-term issues applies for NPO’s. In contrast, governments as presently designed MUST plan only to the next election because the next election can undo their plans, at least in general.

        Libertarians are fighting these -short-term profit only- statutes by legalizing B-corporations, family trusts, and so on.

        Of course some entities are designed for short-term focus, which is a different issue. In general, if what Lion said was true, no one would do long term planning, which is false. The Libertarians of course plan or to be precise set voluntary missions in centuries.

        Robert

        June 21, 2018 at EDT pm

      • “Businesses only care about the next quarterly financial statement and not the long-term viability of the business model.”

        There are so many counter examples to this claim it’s absurd. I can understand that sort of perspective if you work in finance or advertising, but mining and civil engineering and aviation firms all have time horizons of decades. I mean, Lockheed bet the company on the 747 and spent a decade building it.

        bobbybobbob

        June 21, 2018 at EDT pm

      • Amazon is another obvious counter example. It’s been funded for 20 years now in the expectation that it will eventually be hugely profitable (it isn’t yet). Investors and the company management are buying into a story that has required 20 years of patience.

        bobbybobbob

        June 21, 2018 at EDT pm

      • 1. Jeff Bezos dominates Amazon and owns a large percentage of the stock, which is different than most public companies run by hired guns.
        2. Amazon DOES show good numbers quarter after quarter, but the focus is on SALES rather than net income.

        Lion of the Blogosphere

        June 21, 2018 at EDT pm

      • “Amazon DOES show good numbers quarter after quarter, but the focus is on SALES rather than net income.”

        You can sell dollar bills for 99 cents and get fantastic sales numbers, so this is meaningless. Amazon has been allowed to burn through enormous piles of cash over two decades because a huge number of people are enormously patient, contradicting the idea that investors are dominated by short term focus. Tesla is in the same boat. Horrible numbers, but people are sinking money into the long term story.

        In both cases I happen to think these companies are scams that will blow up. Amazon is a huge fraud with no first mover advantage and as soon as they have to stop burning bonfires of cash they’ll get eaten alive by WalMart and NewEgg and a dozen other platforms. But the point is that your story of short term focus is obviously not true. People are willing to believe completely retarded stories about the long term and sacrifice cash for it for many years on end.

        bobbybobbob

        June 21, 2018 at EDT pm

      • “Amazon has been allowed to burn through enormous piles of cash over two decades because a huge number of people are enormously patient, ”

        NO, people who invested in Amazon made HUGE amounts of money!!! Investors LOVE Amazon’s numbers.

        Lion of the Blogosphere

        June 22, 2018 at EDT am

      • Regarding Amazon, not correct.

        The key point about Amazon is that it has massive capital expenditure that is almost entirely funded internally. It does not continually go back to the capital markets to raise money.

        map

        June 22, 2018 at EDT pm

      • Where the heck did you get that idea? Amazon is a cash furnace. They have issued junk debt like crazy over the last couple years. They have something like $25 billion in long term debt now.

        The idea that Amazon has “good numbers” is ridiculous. They have declining operating income and growing debt. I happen to think it’s a ponzi that will blow, but the duration of the scheme clearly disproves the idea that companies and investors can’t invest for the long term. Amazon at no level makes sense unless you believe a very long term story. A stupid story in this case, but definitely not a short term one.

        bobbybobbob

        June 23, 2018 at EDT am

  10. Many years ago I got a come-on in the mail for a Visa card backed by the equity in my home. I shredded it and sent the pieces back to the source with a scathing letter about how such schemes should be illegal.

    sestamibi

    June 21, 2018 at EDT am

  11. We already have a solution to these excesses, bankruptcy. It’s idiotic to lend to these people and these morons that do are going to get burned. Good! We don’t need harsher usury laws.

    XVO

    June 21, 2018 at EDT pm

    • We don’t want government trying to protect people from their fiscal stupidity. Darwin works.

      mpt

      June 21, 2018 at EDT pm

  12. In one-third of new car purchases, the buyers have trade-in vehicles on which they’re underwater (in other words, the loan balances exceed the car values). Dealers just roll these negative balances into the new loans and leave the buyers even further underwater.

    A nightmare scenario is wrecking a car on which the owner is underwater. Insurance pays the vehicle’s fair value, which can be several thousand dollars less than the outstanding loan balance. The hapless owner is on the hook for the rest. And it doesn’t take much at all to damage a car beyond repair, for instance the 2017 Corvette that ended up in a junkyard after sustaining an inch-long crack on its underside.

    Peter

    ironrailsironweights

    June 21, 2018 at EDT pm

    • Don’t worry, you can buy insurance for this now. It’s called gap insurance. What a world!!

      Two in the Bush

      June 22, 2018 at EDT am

  13. To get back on-topic.

    “If you can’t afford to pay for your vacation out of cash on hand, don’t take a vacation.”

    Good advice for families in the long term, but in practice most do fine ignoring it for special cases. The US Government is certainly build on deficit financing like this and tries to get out of it with inflation. Should we have an usury law for them?

    Substitute car, house, business investment, education, margin purchase, farm crop, etc. for vacation and you see how silly it is, especially given how cheap vacations have become thanks to libertarian deregulation. The writer is some kid who needs to walk around the block and rep[ets commie propaganda designed to monkeywrench markets.

    Robert

    June 21, 2018 at EDT pm

  14. This is an example of where the libertarian model of economics fails.

    I agree that the libertarian model allows undesirable outcomes in this situation. I’ve always said that libertarianism was merely a model and that, like all models, has limitations. There’s also a difference between a model that says how things ARE versus a model that says how things SHOULD be. One is objectively descriptive while the other is subjectively prescriptive.

    Regardless, I agree that activities that are clearly harmful to individuals, families and society without any upside should be prohibited. In my opinion alcohol, tobacco, drugs, adultery, gambling and usury qualify. I would even go so far as to mandate certain activities such as childhood education and saving for retirement. Where I draw the line is with extending this to socialism. It undermines personal responsibility and rewards bad choices and behavior.

    destructure

    June 21, 2018 at EDT pm

  15. @map

    That is correct only for commercial real estate. For residential owner-occupied real estate (which accounts for the vast majority of transactions, if not total dollar value) the proper valuation is based on comparable recent sales in the vicinity, with allowance for time value if in a location that is appreciating (or depreciating!) rapidly.

    sestamibi

    June 21, 2018 at EDT pm

    • Net present value calculations apply for residential real estate as well. This is an amortization loan with a fixed annuity payment over several decades

      map

      June 22, 2018 at EDT pm

  16. My reasoned guess is that a very high percentage of airline tickets are purchased with credit cards. Same for hotel charges and many other travel-related expenses.
    Oh, I’m also reasonably sure that most people don’t pay off these charges in full when their next bills arrive.

    Peter

    ironrailsironweights

    June 21, 2018 at EDT pm

  17. People need to enjoy their life and vacations are important to your mental health. You can see it as an investment in your health which will help you work better after that and will increase your income. You laugh at libertarians but this attitude is not less autistic than theirs.

    Hashed

    June 21, 2018 at EDT pm

    • You can take a (cheaper) vacation, enjoy life and improve your mental health without putting a huge balance on your credit card (which, for most people, is a source of stress that harms their mental health).

      Tarl

      June 21, 2018 at EDT pm

  18. If it invigorates you, it may be totally worth it.

    Yakov

    June 21, 2018 at EDT pm

  19. Leisure travel and vacation get-aways are overrated. Over the coming Independence Day holiday, I’ll be enjoying a week-long “staycation”!

    E. Rekshun

    June 22, 2018 at EDT am

  20. […] commenters reaction to the previous post was joyous schadenfreude that some of the dumb proles would face financial ruin when they lose […]

  21. As someone who regularly uses their credit card and then pay it off at the end of the month. I agree that it takes a certain amount of discipline to make money but as someone said earlier Money in a savings account earns very little interest and our credit card pays 3% on most things. Thus we turn what is a potential liability into a profit making scheme.

    No, I would never want to take a vacation that I couldn’t afford to pay for at the time. I doubt if any of you know anyone more prole than I am.

    Oden's Raven

    June 22, 2018 at EDT pm


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