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TRUTH in it's simplest form


red750
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Good debt is where whatever you're borrowing for will end up repaying more in the long run.  Infrastructure, schools, clean energy, medical research, etc - things that will improve the economy through increased productivity, health & education outcomes, etc.  While the interest rate is so low it's the perfect time for governments to do this.


Bad debt is money thrown away on non-productive things.  The wrong infrastructure in the wrong place (eg pork barreling), propping up non-viable industries, tax breaks for people who don't need them, graft, corruption and ineptitude.  (Paying $30 mil for a piece of land worth $3 mil springs to mind).

 

In short it's far better for the government to go into debt if the money is spent well, than for it to always remain in surplus and not spend for the future.

 

That's my feeble understanding of good vs bad debt, the more economically literate will probably correct me.

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Oh. My rusty memory couldn't find recollections of government debt that returns more value than the interest on the borrowings. That's why I figured that all government debt was bad debt.

 

Stuff such as when Queensland Rail borrowed to buy new electric rolling stock. Sounded like a "good debt" that allowed us to replace the old suburban diesel locos and swaying wooden toast rack carriages, with modern air conditioned trains.

Later, Queensland Rail posted a great operational profit (great public fanfare). Because they paid off the debt. An achievement made possible by selling the rolling stock to an Asian investor, and leasing it back!

Stuff like that makes it difficult to discern whether a debt is good or bad. A situation made worse by the fact that media doesn't tell us how many dollars must be borrowed to pay for each vote buying brainfart. Nor what the final cost to us will be when you include the cost of borrowing (interest, etc)

Edited by nomadpete
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Leasing plant and machinery is a good idea for a tax-paying enterprise as the lease payments re tax deductable. But how does the tax collector claim a tax deduction by leasing plant and machinery?

 

Another example of corruption in politics. You can't tell me the pollies or Public Servants involved in the Queensland Rail deal didn't have their palms greased.

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There's only one form of debt, bad. It's extremely hard to recover the interest or capital from a debt, on most occasions you go backwards. I've been self employed/running a business for over 50 years, only went into debt once to buy an asset. The results meant I was chasing my arse constantly and never really getting rid of the debt, until sold some assets to pay it off.

 

Lost heaps of money, put the growth of the company back a couple of years and haven't gone into debt since, all my assets have been paid for on the spot, otherwise don't buy anything. That means my company has no debts, except operational ones for supplies when they won't accept payment on delivery. One of those businesses, billed us account keeping fees, rang them and cancelled all our orders, which ran into thousands a week. Told them you won't accept payment on delivery, but want to charge us for your book keeping. Before ringing had contacted another supplier who put in writing they didn't accept cash payments, but could pay online after delivery and there would be no extra charges. In fact they offered a 5% discount when we paid within 24hrs of delivery, via bank transfer and they still supply us after more than 30 years.

 

It really shows how gullible and stupid the majority of people are, they allow politicians to go into debt, waste billions a year on themselves and through the totally incompetent and over paid bureaucracy, yet the people never hold them to account and keep voting for them. They even charge the people to go to fly to political party meetings in expensive private jets, when political parties have nothing to do with running the country, they just rip it off.

 

We  don't deserve to survive as a society or race, when just about all are so stupid and irresponsible they continue voting in idiotic morons who destroy everything they touch and waste our money like they are throwing confetti.

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IF you waited until you could pay cash for a house you would wait a long time. Safe as Houses is misleading though. In a depression most assets tumble in value. Those with money buy up at eyewatering bargain prices. Real money is in property and land especially where you can mine it. ALL buildings eventually have to be demolished. Some Cities are over capitalised. There has to be a practical limit on how much per square foot is spent on it. and WHO is paying for the high cost infrastructure installation and repair.  Nev

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5 minutes ago, facthunter said:

IF you waited until you could pay cash for a house you would wait a long time. 

Especially when the price rise outstrip interest rates.

 

I knew a bloke who thought like that when he was younger.  Refused to go into debt.  Worked like a horse and saved $100,000.  The average price of the location he wanted to buy in was $120,000 at the time (this was back in the early 90's).  He flat out refused to borrow the remaining $20,000 and kept saving.  Then Hobart went through a housing boom and all of a sudden the houses that were $120,000 became $220,000.  He ended up having to admit defeat and get a mortgage that was about $100,000 more than if he'd done it a year earlier.

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It would be ridiculous to pay a third or more of your wage in rent whilst attempting to save enough money to buy a house in cash. The important thing is not borrowing more debt than you can service.    In many businesses it is often the only way to operate . My wife used to work for an engineering company that designed state of the art water filtration units. These units are built inside shipping containers and are are sold throughout Australia and around the word.  A large order sells for millions.    As a small family company they could not afford the upfront cost of each project.  Instead they do not build until a binding contract been signed and then use an overdraft until progress payments begin to flow.  This allows them to work on more than one project at a time.  This temporary debt IS good debt.

 

 

A truck owner/driver is unlikely to be able to afford a semitrailer upfront.   I guess the options would be to only work for a large company that supplies the vehicle,  lease the vehicle which entails an ongoing cost forever or to get a loan that they can easily serviced with the business incomings and this will be paid off eventually and you will own an asset that could be sold if necessary.

 

As a real world example, I worked for music teaching studio in Canberra.   When I worked there the owner had 2 premises.   When he started the business he rented these 2 premises for quite a large monthly rent.  Eventually he secured a loan and bought 2 new premises and for less than the rent he was paying was building assets for the business.   This debt was good debt.

 

Being that we are mostly people here who are into flying we would understand that the average flying school does not start with someone saving up hundreds of thousands of dollars to buy aircraft but they will borrow enough to set up a hopefully profitable business.   

 

I am in debt.     This afternoon I can say that I owe precisely $274 to my credit card which is what I have spent this week.  In about an hour my wife and I over a glass of wine will do our weekly accounting and we will pay that amount.  This costs us no interest and allows us to operate efficiently.   I don't see this as bad debt.  we also about $1100 which was for a 2K interest free loan for our rooftop solar.   We didn't need the loan because we have plenty put away but the smart thing was to take the loan.   It is a question of taking the money out of our super losing 19%  interest or using the interest free loan.  I would rather have my money growing.   This seems like good debt.

 

When it comes to governments there is also good and bad debt.    During the financial crisis of 2007/8 this country was able to largely avoid the financial misery of countries like the US by keeping the economy afloat.   There is of course a lot of very bad government debt (submarine anyone?)

 

Good debt is borrowing to avoid a catastrophe, for a government this might something like a world war or a a natural disaster and on a personal level it could be borrowing to pay for for child's life saving medical treatment.     Good debt is also debt that can generate revenue that is many times greater than the loan plus interest.   Both of these are only good if they can be paid back.

 

Without debt we surely would not have infrastructure that we have.

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1 hour ago, facthunter said:

IF you waited until you could pay cash for a house you would wait a long time.

It was a house and since have always paid cash for building assets, it's just a matter of good planning. In my case, extra money no matter how small or big, goes straight into an interest bearing account. The assets I usually buy are rural, shut down pubs, shops, derelict houses, etc then we do them up, reopen, rent or sell them. After a few years of doing that, you can accumulate quite a large sum and when you do a few quick rollovers, you end up with a slush fund that earns a little bit of money. Then you look for an asset you can turn over fast and can double your investment in a few months, if lucky.

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Bad debt is when the government pays money to whoever as part of some new scheme to achieve an aim. Like Labor paying big money for roof insulation.

It doesn't matter which government it is, that government is splashing money around with absolutely no idea if it is doing any good or not and even less about if it is sensible.

Current governments seem to think that throwing money at a problem is fixing it. Pensioners are not being looked after properly, throw money at it. The money may not really be borrowed, but it is ensuring that the government has to borrow for something else.

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50 minutes ago, Yenn said:

that government is splashing money around with absolutely no idea if it is doing any good or not and even less about if it is sensible.

Sadly, this is true. It also happens in the private (larger corporate) sector, but until someone completely eff's up, it is allowed to go on.

 

I forget what it is called, but one of the problems is the other peoples' money syndrome (that's what I am calling it). Its basically where if it were the person's own money they would be far more careful with it than they money they are given to spend/invest. It's the same with real estate agents - they will inevitably get a better price for their own home than a similar home for a client because the extra commission they make on the client's house is not as much as the extra money they get with theirs.. so it's not worth their while to work the extra bit harder to earn a marginal amount more.

 

Back to debt, it is not all bad. Of course I would say that as I work in an industry that pedals in it. But many people have profited handsomely by taking on debt. It comes down to two things - emotional in terms of risk aversion and being in debt with the obligations it brings, and numbers.

 

On the emotional side, aversion to risk is a huge factor. Some people just hate it and want rid of it. I used to be like that, but not so much as I get older (I know.. I am a bit backwards). Some people are cavalier with it, too. They are the ones that almost without exception get completely bitten. As an example, a friend of mine in his younger days had the emotive urge to impress everyone with his wealth. The problem was, as a university student from a lower middle class background, like me, he was broke. His capacity for hard work was enviable - if I had it, I wouldn't be tapping away at a keyboard about this. He would go to university during the day and work at I think it was Safeways back then stocking shelves in the evening for 8 hours. Instead of buying a normal car to get from A to B, he had to buy a late model Mazda RX-7 from memory. He also bought the finest clothes (I am talking Gucci or something like that), while we scraped for a pair of Levis.. thankfully Miller shirts were out by then.

 

I was thinking why go to university when you can have all of this on a store worker's pay..well not really, as I knew he purchased everything on credit. His view was if he could get through university, he could land a job that would pay well and pay off his debts. I warned him he was developing bad habits and that no one expects young uni students to be rich - in fact most people are not impressed with his designer wear and fast car - except for a gold-digger apparently, which he kept well hidden from us.

 

Sure enough, reality bit hard and it all came crashing down around him. Graduating as a microbiologist doesn't propel you into one of those fast paying jobs such as lawyer, doctor, dentist, or banker, and he went broke. Sadly, he continued the cycle - not sure how.. but it wasn't long before he racked up debts and crashed again.

 

Compare this to my brother who tool on a massive personal debt at about age 21.. It was to buy a house and he over extended. But, he didn't worry about the risk - he was averse to it, don't get me wrong, but not enough to blur his vision about what it can bring to him. He did his research and worked out the cardinal rule of real estate.. position, position, position. And with that, he obeyed the second rule - better to buy the worst house in the best street than the best house int he worst street. He purchased a weatherboard 3br house in what was then Burwood in Melbourne, right on the border with Camberwell. He went through some very tight times, but held his nerve and over the journey, his research paid off as he had worked out with the population growing and the desirability of the inner eastern suburbs, demand would grow and push up the prices. Which they did as a result of that and the area he had his house in was re-classified as beiung in Camberwell, which immediately increased the value of his property. He used his new found equity to take on more debt and purchase rental properties (with the benefit of negative gearing) built himself a handsome income earning portfolio. The numbers were well researched and the income was only available to him by taking on the debt, and taking on more debt allowed him to increase it more and more.

 

 

The numbers of course have to be right, and they can go wrong - that is a fact of life. But with the 6Ps (proper planning prevents piss poor performance), you can use dent to greatly and sustainably increase you income.

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For personal finance, borrowing is OK if before you borrow you worked out that you could service the debt if the interest rates went stupidly high. If the house mortgage interest is around 3%, then I'd ask what the repayments were at 10% and see if I could handle that. 

 

A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time. However, who has a crystal ball to know when the lean years are coming and how many there will be in a sequence.

 

Also, if a government runs surplus budgets, complaints of over-taxation will not be far away.

 

 

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36 minutes ago, old man emu said:

If before you borrow you worked out that you could service the debt if the interest rates went stupidly high. If the house mortgage interest is around 3%, then I'd ask what the repayments were at 10% and see if I could handle that. 

I would agree these days that younger mortgage borrowers don't know interest rates of even 8% let along the 17% or whatever it was in the late 80s/early 90s. However, central bankers use interest rates as one lever to stabilise the currency and inflation/growth. One of the problems they have is that a lot of the economy is now exposed to low interest rate exposures. We are on a 5 year fixed 2% rate, for example (we could pay it off, but we use the money far more productively than 2%). While we are fixed, when we come off it, say it jumps to 7%, we are OK, but many other younger borrowers won't be and they will hit the wall financially. The central bankers are acutely aware of this and will use every other lever before hiking interest rates.

 

The big losers in this are the banks as their interest rate margin is squeezed due to competition of all this cheap money flowing around. [Edit] But they still make money - no worries about that

 

The trick is to not necessarily plan for the shock events such as ultra-high interest rates, but the likely events such as moderate - high interest rates - unless you think the shock event is ob the horizon that it will sink you. For example, my brother purchased his house in '86 or '87 but at his age, he saw it coming (not quite as big as it was), but thought he was young enough to weather the storm and if the roof collapsed, well he was also young enough to learn and start over (no kids or wife to feed). In this case, fortune favoured the brave.

 

I think there will be an interest rate correction - how big is anyone's guess. But central bankers will not be aggressive unless there is some reason to be as they know if they go aggressive, it will be a blood bath. I am not sure how Aussie banks go during a shock, but when we had the GFC here, the banks were very flexible; foreclosing results in a glut further pushing down prices, even if they don't openly market them. While they are on the banks' books empty, they are not earning money and the likelihood of getting anything more out of the borrowers is negligible. So they opted to keep them in their homes and have them pay what they could, if anything at all. It was only when all hope was lost that the banks foreclosed, but often the borrowers had already handed back the keys voluntarily. Banks can be arseholes, no doubt, but in the crisis, they did act responsibly. Of course, they expected payback afterwards, but it is a better result than homeless families.

Edited by Jerry_Atrick
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I think your wrong !.

We had that super high interest rate, and the banks loved it, they forclosed on hundreds of mortgage s.

It took a court case to break the cycle 17.75%, & climbing.

No complaints from the banking sector what so ever. They will do exactly the same again, cheap homes for their friends in the know.

spacesailor

 

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My nearest city Gladstone Qld had a massive influx of overpaid workers to builld the gas lplants on Curtis Island. When that constructiion finished there was a glut of overpriced houses on the market. Some people survived by the husband working away from home and the wife stayed put. Others stayed put but out of work. A big percentage could not keep up the mortgage rates and the banks foreclosed. Those houses stayed empty for a couple of years and the banks trickled them back on the market to get higher prices and a few were used by government to house poor people from around Brisbane, resulting in an increased crime rate and many needy people, but the banks did OK.

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Spare a thought for the poverty stricken Irish leprechaun leading our national airline. He was dragging in $24M in annual renumeration in 2016-17, prior to COVID-19, then he got down to a pathetic $1.744M in 2020. But he did get a pay rise in 2021, his total remuneration recovered to $1.979M.

 

https://www.perthnow.com.au/business/alan-joyce-gets-235k-remuneration-lift-but-still-way-below-his-previous-package-as-australias-highest-paid-exec-c-3993520

 

I don't know how he's surviving today, maybe we should pass the hat around for him. :crying:

 

 

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On 25/09/2021 at 3:07 PM, facthunter said:

Every thing out there is designed to send you broke or make you unhealthy. Nev

You've hit the nail on the head, been trying to tell people that for decades, but no one listens. Don't think most know what truth really is, many can't been be truthful with themselves, let alone others or life. Politician certainly have no clue what truth is in anything they do,  bet they can't even by honest with themselves or their families.

 

These CEO's who get millions a year, are a major part of our problem, money which should be in the hands of people, is hoarded by these morons and probably ends up making homes more expensive for the average person. If i was running the country, would introduce a wealth tax of 150.9% on all earnings over $200 000 and back date it to the beginning of the century.

 

I'd also nationalise all resources and add a trust and wealth tax of 99% of all trusts holding more than $1 million. Then we have the huge problem where the comp nay tax rate, is less than the employees tax rate and companies can claim deductions for just about everything they spend, but employees can only claim a very small number of things and they are likely to get some of them knocked back.

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