Kind of. The point is that you always want to argue about the "rich" being too "rich" etc. But the idea that you always want to pay off debt shows that you have little insight into investing and leveraging, therefore making your opinion regarding the "rich" kind of invalid.
Of course it matters what the money you borrow is used for. Companies borrow all the time to purchase new plants and equipment. With the intent to make a lot more in sales than the equipment loan payments cost, of course. If you had $100K in the bank, would you think it better to buy one $100K house for cash, or 10x $100K houses with $10K down each? On the other hand, if you run up your credit card going to the movies, all you have is a debt payment and nothing to show for it.
In each case you have to weigh cost/benefit. I will try to fit the first given scenario that Johnny has 10k in debt. Should he pay $500 into a retirement fund (investing for the future) or pay off debt (decreasing future payments). 1. Say that your scenario is a sole proprietorship and it is the owners goal to pay for a luxury car. Under your scenario, you are saying that he can never have that car because the money is better spent on the business. That would not be true if the cost of the car is going to be more in the future and the rate of return for making new factories is lower. So a hypothetical cost/benefit could look like this: Buy a car now: 10k. A 10K loan would be taken out against the business and paid at an 8% rate. Wait one year to buy car: 20K. A 20k loan taken out against the business at an 10% rate. For the additional factories to pay off, they must make the difference between the two opportunities. Buying a car now gives you one more year of use out of the car, locks you into a lower rate, and costs 9200 less initially compared to waiting a year. It is not a given that the factories make this profit. 2. I think anyone that bought a second home during the housing boom can identify with this one. If you bought before the boom, the 100k would have been better spent paying 10 10k downpayments. If you bought at the peak, it would have been better to pay 100k on one house. 3. Taking on credit card debt would make sense in this scenario if it took the place of another destructive behavior. Say that it is likely that a person is going to spend even more money drinking if they are not occupied. There are other cheaper ways that they could eliminate drinking, but the $8 on a movie with 18% interest is better than $100 on drinks, $1k on a DUI, and loss of job.
Absolutely. Which would pay off the debt faster (assuming dramatically limiting the size of government): 19% of a $13T pie or 19% of a $16T pie? In other words, focus on the size of the pie and not how it's sliced.
You miss the point about leverage. Buy a $100K house for $100K cash. It goes up 1% in value, you've made $1K on your $100K investment, or 1%. Buy a $100K house for $10K down. It goes up 1% in value, you've made $1K on your $10K investment, or $10%. You borrowed the money at 5%, so you profit. Carry on.
Re-read that. I did not miss the point about leverage. It assumes that you have to live in one of the houses. I said the exact same thing with assessing the situation before the boom that buying multiple houses was better. Not for sure what that carry on business is about.
Johnny and his $10K in debt has 9 houses paying him rent income, enough positive cash flow to pay his credit card payment. Or he could have 8 houses.
I see "what it was used for" as another way of saying "cost/benefit". Maybe you guys aren't disagreeing Ed O.
It seems to me that Denny disagrees because he is labeling luxury items as always being a bad "what it is used for". I also showed how paying 100k on one house would have been better than putting 10k down on ten houses. To put it in the form as his example: Two Johnny's must live in a home and that home loan requires 10k down and home value is 300k. Home prices are at all time high and they have 100k. First Johnny sees that there is a big risk for a housing downturn and puts 100k down on his house. A year later, the housing market collapses and his house is now worth 200k. His payments are lower than if he would have only paid 10K down and has positive equity in his property dispite losing money on his investment. Second Johnny puts 10k into his primary residence and buys 9 other properties, puttting 10k down. After one year, he still loses the same 100k equity in his house, his payments are higher, and owes more since he is paying interest on 90k more per year compounded. The first year his rentals provided a positive cash flow and he could make payments. However, he still loses 90k in equity X 9 per house equalling 810k debt. His tenants see the decrease in housing value, foreclosures, etc and the rental market also goes south. Johnny can only charge 2/3 of what he originally got in rent and now must find other money to pay his mortgages.
If he bought 10 houses for $300K each and they fell in value to $100K each, at the end of 30 years, he'll own $1M worth of houses outright.
That sounds nice, but that's not how the rich roll. If it was, we'd ALL be rich by now. This is how it really works: If GDP is $100 the rich take 99.999999% of it, there's less than $.01 left for everyone else. If GDP is $1000 the rich take 99.999999% of it, there's $.10 left for everyone else. There is no significant improvement in the average American's standard of living that corelates to the rise of the GDP. America has been re-designed to prevent the American Dream from being attainable to all but a select few.
Only if you help him make his mortgage payments for 30 years, as falling rents won't support that Ponzi scheme. He'll most likely lose all 10 homes to the bank.
In the real world the rich guy often ends up paying less (often pays no tax at all) total than the poor guy due to the wonderful world of write-offs, credits, exemptions, tax shelters, depreciation... 19% to a guy making 10k means no health ins, or maybe he'll have to give up his kids for adoption because he can't feed them. 19% to a guy making 1mil per yr means if he has the worst cpa in the world, he'll still take home $810,000 a year. No significant change in his lifestyle will be necessary. America is known around the world as a tax haven for the rich. Most other indutrial countries tax the wealthy more severely. Britain used to, and likely still does, take 50% from the wealthy. That's why 3 of the Beatles moved to America, to shield their wealth. The fact that Paul McCartney stayed in his homeland and willingly paid his fair share to support it is why the Queen knighted Paul and not the other three.
Thanks for reading the entire post. Denny, as I posted previously, the rent income decreased 2/3. Johnny #2 has to supplement this with income from another source. If you are truly this bad at math, I have a condo in Chicago you may be interested in.
To the guy making 10k, Obama made health insurance possible. I am also believe that if you have a kid, it is your responsibility to provide for them. I am all for closing loopholes, but am not a fan of the government re-distributing wealth on such a large scale. It seems as if you are assuming the 10k guy and the 1M guy worked the same and deserve the same.
Just because some investments go bad doesn't mean that borrowing for the purpose of leverage is a bad idea as well.
