Debt: The Good and the Bad

Felix comes to the defense of Suze Orman. I think he makes a good case for her. Orman’s advice probably helps more people in more important ways that almost anyone you see on CNBC.
The only curious thing I would add is that when you get right down to it, how hard is it to say, “don’t buy things you can’t afford?” It’s not really about finances, it’s just basic discipline. Don’t buy stupid stuff you don’t need, and save what you can. Repeat. I guess I shouldn’t be too harsh. For many people, this lesson may come as a revelation.
Warren Buffett has often said that the biggest problem that consumers have is credit card debt. I think he’s right. I’m afraid to find out how many people have bought pizzas that turned out to cost them $200.
Speaking about debt. Virginia Postrel has a great column in Forbes decrying the endless hand-wringing of debt-phobes. Yes, debt can be a good thing.

When credit is cheaper to use and easier to arrange, people do use more of it. Hence those big, scary numbers, which grow along with the economy and the population. Contrary to a common perception, however, the people driving up the totals aren’t primarily the financially strapped. They’re “high-wealth consumers in their prime earning years,” observes Andrew Kish, an economist at the Philadelphia Federal Reserve. Almost half the growth in debt between 1989 and 2004 (the most recent year for which data are available) came from the highest-income 20 percent of American households. (By contrast, the bottom 20 percent held about 3 percent of consumer debt—an increase from 1.9 percent—and accounted for a bare 4.5 percent of the growth.) If the rich are getting richer, it makes sense that they’re also running up more debt. They can reasonably expect to pay it.
These affluent families also account for half of the outstanding consumer debt. So the $10,000 average that Obama cited isn’t in fact owed by the “typical” family with an average income. That figure is calculated by spreading the much larger debts of the rich over the population as a whole. All by herself, Cindy McCain owed at least $200,000 on two American Express cards, according to her husband’s campaign disclosure documents. That sounds terrifying until you realize that this wealthy woman pays her monthly AmEx bills in full.

Posted by on October 17th, 2008 at 12:33 pm


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