The world is ending, help me rack up debt!!
August 4, 2011 9:43 PM Subscribe
With the potential of a global economic collapse, should I cash out & take on lots of debt?
Preface, college student, no student loans thus far, totally paid for education by hard work, use credit to manage cashflow & generally regard debt as bad.
Considering today, August 4 2011, we lost the entire gains of the year 2011 in 1 day, with Europe on the brink of financial disaster and the Asian markets hit really hard, is now the time to cash out?
Not only do I have some cash in the bank but I have lots of credit available to me. What about cashing out, taking on debt in leu of a total economic collapse. If it's going to go away anyways, why not?
Do the people of the web see anything ethically, logically or something else wrong with this idea? If it's all going to disappear anyways, why not buy a new Macbook Pro, an iPhone & a surf board?
What should I buy?
Preface, college student, no student loans thus far, totally paid for education by hard work, use credit to manage cashflow & generally regard debt as bad.
Considering today, August 4 2011, we lost the entire gains of the year 2011 in 1 day, with Europe on the brink of financial disaster and the Asian markets hit really hard, is now the time to cash out?
Not only do I have some cash in the bank but I have lots of credit available to me. What about cashing out, taking on debt in leu of a total economic collapse. If it's going to go away anyways, why not?
Do the people of the web see anything ethically, logically or something else wrong with this idea? If it's all going to disappear anyways, why not buy a new Macbook Pro, an iPhone & a surf board?
What should I buy?
Best answer: 1. Don't ever think your debt will go away even if a country or a company's debt disappears. You are a small slow fish, and the company that services your debt is a big, fast shark... If anything, remember your debt is someone else's revenue: meaning if they can't float their books through a loan, they have no problem putting the screws to you to recoup, meaning higher interest rates, reposession, and any other number of things designed to hurt you more than it hurts them...
2. If you have money invested in the stock market, this was probably a good week to have been shorting stocks you thought were at risk from tanking. Similarly, tomorrow might be a good day to buy long term investment stocks as hopefully those prices have dropped... don't think of it as the economy is tanking, think of it as your buying power is increasing...
posted by Nanukthedog at 10:10 PM on August 4, 2011 [1 favorite]
2. If you have money invested in the stock market, this was probably a good week to have been shorting stocks you thought were at risk from tanking. Similarly, tomorrow might be a good day to buy long term investment stocks as hopefully those prices have dropped... don't think of it as the economy is tanking, think of it as your buying power is increasing...
posted by Nanukthedog at 10:10 PM on August 4, 2011 [1 favorite]
You can take on as much debt as you'd like, but you're going to eventually pay that money back. As scary as the headlines are, global economic collapse isn't imminent and, even if it was, your plan wouldn't work very well.
Also: don't sell stocks when the market falls. That's the best way to lose lots of money.
posted by eisenkr at 10:15 PM on August 4, 2011
Also: don't sell stocks when the market falls. That's the best way to lose lots of money.
posted by eisenkr at 10:15 PM on August 4, 2011
Plenty of economic entities persisted even through the great depression. You have to factor in the chance that you likely will still be screwed for your debt even if the global economy suffers. You only get off scot-free with your loot if the collapse is almost all-encompassing, at which point you should probably have been spending your money buying bullets and farm equipment instead of surfboards.
posted by drethelin at 10:17 PM on August 4, 2011
posted by drethelin at 10:17 PM on August 4, 2011
If you're totally confident that you, a college student, know what the global economy is going to do, while millions don't, and that that includes hyperinflation in the currency of your choice, then yes, sure, go for it. Your debts would be inflated away, and you walk away with a laptop and a surfboard, or similar. Of course, if you're wrong, you've just bollocksed up your next few years for some trinkets.
It seems like a very very risky call to me.
posted by pompomtom at 10:21 PM on August 4, 2011 [2 favorites]
It seems like a very very risky call to me.
posted by pompomtom at 10:21 PM on August 4, 2011 [2 favorites]
(of course, if the nature of this collapse includes deflation, racking up debt is precisely the wrong thing to do...)
posted by pompomtom at 10:22 PM on August 4, 2011
posted by pompomtom at 10:22 PM on August 4, 2011
A global downturn is not the same thing as the entire planet heading towards Mad-Max times. I would avoid going into debt if at all possible. Forget about preparing your body for the Thunderdome and keep working hard to get through college free of debt.
posted by Nightman at 11:17 PM on August 4, 2011
posted by Nightman at 11:17 PM on August 4, 2011
Considering today, August 4 2011, we lost the entire gains of the year 2011 in 1 day, with Europe on the brink of financial disaster and the Asian markets hit really hard, is now the time to cash out?
We had a similar downward move in the stock market last summer. What were you thinking last summer? If you were trying to convince me you are right this time, you'd have to explain to me what you were thinking last summer, why this year is different and how your particular insights justify a market timing call (note: I am just describing a standard for decision making, not asking you to make your argument here on metafilter).
Also, I agree with pompomtom's assessment of the risk/reward here.
posted by mullacc at 11:30 PM on August 4, 2011 [1 favorite]
We had a similar downward move in the stock market last summer. What were you thinking last summer? If you were trying to convince me you are right this time, you'd have to explain to me what you were thinking last summer, why this year is different and how your particular insights justify a market timing call (note: I am just describing a standard for decision making, not asking you to make your argument here on metafilter).
Also, I agree with pompomtom's assessment of the risk/reward here.
posted by mullacc at 11:30 PM on August 4, 2011 [1 favorite]
Listen kid, if we're really looking at global collapse on that order, just make sure you're one of the first looters.
posted by i_am_joe's_spleen at 12:23 AM on August 5, 2011 [2 favorites]
posted by i_am_joe's_spleen at 12:23 AM on August 5, 2011 [2 favorites]
Well, one thing wrong with this idea is that it's nuts. I can only assume you're not a college student studying economics. Why do you think your debt to a bank would be erased or forgotten if the stock market falls a bit?
posted by joannemullen at 1:52 AM on August 5, 2011
posted by joannemullen at 1:52 AM on August 5, 2011
If you're speculating that you can rack up debt, buy some trivial luxury items, and no one will be around to collect in a year, your thinking is a little off. What may be a little more realistic is that you borrow as much as you can, but can reasonably pay back if need be, and buy something of lasting value that will either save you money or provide an adjusted income for you if the country goes into a period of hyperinflation. The most obvious things people usually buy with this assumption are property and gold.
The idea is that if you were to take out a mortgage for say 200k on a house, in the next few years you will still be responsible for that debt and have to continue making the payments or you can be foreclosed upon. Buy in five years, hyperinflation may have pushed things so that 200k might be an average workers weekly pay and that house may be worth 10 mil, although you are still making payments on the lower value you borrowed.
However, in the meantime, there may be a period where the money supply is low and that low mortgage payment is hard to come up with. In this kind of scenario the goods you mentioned buying would not be useful because during the 'adjustment' period, people will be concerned about buying bread, not iphones, and you will be in line with them.
posted by Yorrick at 2:13 AM on August 5, 2011
The idea is that if you were to take out a mortgage for say 200k on a house, in the next few years you will still be responsible for that debt and have to continue making the payments or you can be foreclosed upon. Buy in five years, hyperinflation may have pushed things so that 200k might be an average workers weekly pay and that house may be worth 10 mil, although you are still making payments on the lower value you borrowed.
However, in the meantime, there may be a period where the money supply is low and that low mortgage payment is hard to come up with. In this kind of scenario the goods you mentioned buying would not be useful because during the 'adjustment' period, people will be concerned about buying bread, not iphones, and you will be in line with them.
posted by Yorrick at 2:13 AM on August 5, 2011
It may be useful to look at the DJIA for the last 5 years to get some perspective on this.
posted by vacapinta at 2:23 AM on August 5, 2011 [6 favorites]
posted by vacapinta at 2:23 AM on August 5, 2011 [6 favorites]
I've done this. The way I see it, there is no way that I'll be able to avoid paying back a debt, but there are all sorts of ways I can lose assets or have them devalue.
You need to be careful - you pay interest on debt, and you need to know you can service it if the worst happens and you lose your job and your savings and don't have much going for you.
So - don't take on a debt you can't escape. If you're buying a car, you want to have a HUGE margin by which you're not underwater, such that if you needed to sell quickly, you'll easily more than cover what you owe despite taking a big hit on the price. If you're buying a plasma TV, anything by Apple, etc... just don't. Buying that stuff second hand, maybe, then it might maintain a resale value in the ballpark of what you paid for it. But don't take on debt that you can't free yourself of in an emergency.
If you're going to use debt as a financial hedge, go into debt in exchange for assets that have assured, inherent, value that will keep value in a recession. An iphone is the worst thing you could buy.
And obviously, whatever assets you acquire must be insured. If it's stolen or damaged, meaning that you can't sell it, you need to be able to get out from under the debt through insurance.
But before you do this, if you haven't already, it might be better to diversify. Do you have a bank account in other country where the economy is quite distant from your country's economy? Get some eggs in some other baskets.
posted by -harlequin- at 2:28 AM on August 5, 2011 [1 favorite]
You need to be careful - you pay interest on debt, and you need to know you can service it if the worst happens and you lose your job and your savings and don't have much going for you.
So - don't take on a debt you can't escape. If you're buying a car, you want to have a HUGE margin by which you're not underwater, such that if you needed to sell quickly, you'll easily more than cover what you owe despite taking a big hit on the price. If you're buying a plasma TV, anything by Apple, etc... just don't. Buying that stuff second hand, maybe, then it might maintain a resale value in the ballpark of what you paid for it. But don't take on debt that you can't free yourself of in an emergency.
If you're going to use debt as a financial hedge, go into debt in exchange for assets that have assured, inherent, value that will keep value in a recession. An iphone is the worst thing you could buy.
And obviously, whatever assets you acquire must be insured. If it's stolen or damaged, meaning that you can't sell it, you need to be able to get out from under the debt through insurance.
But before you do this, if you haven't already, it might be better to diversify. Do you have a bank account in other country where the economy is quite distant from your country's economy? Get some eggs in some other baskets.
posted by -harlequin- at 2:28 AM on August 5, 2011 [1 favorite]
The way I see it, there is no way that I'll be able to avoid paying back a debt, but there are all sorts of ways I can lose assets or have them devalue.
It sounds odd to suggest I decided some debt was preferable to some assets, when I'd just use the debt to acquire... other assets! But what I mean is that I'm using debt to reduce my reliance on assets that I don't have much confidence in the rate at which they'll hold value (currency & exchange rates for example), by acquiring different assets for which I have more confidence in the rate at which they'll hold value independent of exchange rates - or assets for which I know I'll lose value, but at a much more known and predictable rate; a loss which might be - in my opinion - offset by some utility they provide me while I own them.
posted by -harlequin- at 2:36 AM on August 5, 2011
It sounds odd to suggest I decided some debt was preferable to some assets, when I'd just use the debt to acquire... other assets! But what I mean is that I'm using debt to reduce my reliance on assets that I don't have much confidence in the rate at which they'll hold value (currency & exchange rates for example), by acquiring different assets for which I have more confidence in the rate at which they'll hold value independent of exchange rates - or assets for which I know I'll lose value, but at a much more known and predictable rate; a loss which might be - in my opinion - offset by some utility they provide me while I own them.
posted by -harlequin- at 2:36 AM on August 5, 2011
Since you are already thinking about these shifts taking place, kudos for the foresight. However everyone else has already pointed the pros and cons of your current plan.
An alternate - look around for banks which passed the stress test or did well enough and shift your account there. Spread your risk by looking at alternate currencies/countries if possible. If you must take on debt, invest in assets which have less impact on their value by fluctuation in the 'consumer' market - gold, diamonds, etc and perhaps not even real estate. An alternate is to take on debt and put it into short term rolling CDs if you are able to get interest rates that justify this action.
But current approach? No.
posted by infini at 4:19 AM on August 5, 2011
An alternate - look around for banks which passed the stress test or did well enough and shift your account there. Spread your risk by looking at alternate currencies/countries if possible. If you must take on debt, invest in assets which have less impact on their value by fluctuation in the 'consumer' market - gold, diamonds, etc and perhaps not even real estate. An alternate is to take on debt and put it into short term rolling CDs if you are able to get interest rates that justify this action.
But current approach? No.
posted by infini at 4:19 AM on August 5, 2011
Assuming that we devolve into anarchic chaos (nb: I do not think this will happen), there's going to be nothing from stopping the banks from resorting to Mafia-style tactics to collect their debts.
In other words, this is an especially bad idea. Things are bad, but the idea of credit is not going to disappear overnight.
posted by schmod at 5:15 AM on August 5, 2011
In other words, this is an especially bad idea. Things are bad, but the idea of credit is not going to disappear overnight.
posted by schmod at 5:15 AM on August 5, 2011
there's going to be nothing from stopping the banks from resorting to Mafia-style tactics to collect their debts
Except for, you know, the FDCPA.
Oh wait, you said anarchic chaos.
So, like, no police or government or working computer networks or...banks.
posted by trevyn at 5:59 AM on August 5, 2011
Except for, you know, the FDCPA.
Oh wait, you said anarchic chaos.
So, like, no police or government or working computer networks or...banks.
posted by trevyn at 5:59 AM on August 5, 2011
Considering today, August 4 2011, we lost the entire gains of the year 2011 in 1 day, with Europe on the brink of financial disaster and the Asian markets hit really hard, is now the time to cash out?
The time to cash out was Aug 3. Selling after a loss just locks it in.
I predict the Dow will be back up a good 400 points today (Aug 5).
Unless you are specifically in the trading game, trying to time the market is a fool's game. I have a small 401k invested in various mutual funds. I was unable to predict the market crash of 2008-2009 and lost a lot of paper value. I let it ride, and was back up to even within 6 months of the bottom.
Just checked the thing. It is down 7.75% since Aug 1. That's not good. But it's up 30% for the last year. That's good.
In other words, go ahead and cash out. All the better for those of us playing the long game.
posted by gjc at 6:03 AM on August 5, 2011
The time to cash out was Aug 3. Selling after a loss just locks it in.
I predict the Dow will be back up a good 400 points today (Aug 5).
Unless you are specifically in the trading game, trying to time the market is a fool's game. I have a small 401k invested in various mutual funds. I was unable to predict the market crash of 2008-2009 and lost a lot of paper value. I let it ride, and was back up to even within 6 months of the bottom.
Just checked the thing. It is down 7.75% since Aug 1. That's not good. But it's up 30% for the last year. That's good.
In other words, go ahead and cash out. All the better for those of us playing the long game.
posted by gjc at 6:03 AM on August 5, 2011
This is the kind of thing they mean when they say the stock market is volatile.
posted by smackfu at 6:12 AM on August 5, 2011
posted by smackfu at 6:12 AM on August 5, 2011
Everyone has made very salient points, but I would strongly recommend you look at what gjc wrote. The DJIA graph that was linked is also a great indicator that there is absolutely no need to panic during this current sell off. In just over a year from 2008 to 2009, the Dow went from 14,000 to 6,000. That is a massive loss and it still wasn't the end of the world (which should give you some indication as to how rigged the world of finance can be). I remember before the Dow hit 14,000, some people predicted it would climb forever. I remember when people thought that housing values would rise forever, which was just a few years ago, by the way. I remember when the Dow hit 6,000, some analysts thought it might not hit 10,000 again for a very, very long time, like 10 years or more. It was back over 10,000 in just about a year.
I would also recommend you go back and review the debt ceiling fiasco. The country was held hostage by right-wing Tea Party lunatics who wanted us to default on our debt. If we had, then all debt interest rates in the US would have been very likely to rise. And we're not out of the woods on that problem by a long shot.
posted by Slothrop at 6:33 AM on August 5, 2011 [3 favorites]
I would also recommend you go back and review the debt ceiling fiasco. The country was held hostage by right-wing Tea Party lunatics who wanted us to default on our debt. If we had, then all debt interest rates in the US would have been very likely to rise. And we're not out of the woods on that problem by a long shot.
posted by Slothrop at 6:33 AM on August 5, 2011 [3 favorites]
Considering today, August 4 2011, we lost the entire gains of the year 2011 in 1 day, with Europe on the brink of financial disaster and the Asian markets hit really hard, is now the time to cash out?
Generally gains come slowly and losses come quickly. When you see a 20% gain happen over the course of 6 months or so, you have to expect that at some point there's going to be a point where you see a 10% loss. That's just how it works, if there were never big losses like this once in a while you'd get 30% per year returns instead of 10% per year returns or whatever. The point is that on average, prices go up slightly more than they go down, even though it's extremely difficult to figure out which way it's going to go at any given time.
If it's all going to disappear anyways, why not buy a new Macbook Pro, an iPhone & a surf board?
You sound a lot like the people who drained their bank accounts earlier this year because they thought the world was going to end on May 21. It's extremely unlikely that a completely unprecedented total global financial apocalypse will happen any time soon. Even if you are correct that we are headed toward a huge crash, huge crashes do not tend to magically free people from their debts.
An alternate - look around for banks which passed the stress test or did well enough and shift your account there.
Thanks to FDIC insurance you don't have to worry about your bank going under. Plenty of banks failed during the last financial crash, and nobody within the FDIC limits lost any money from any of them.
posted by burnmp3s at 7:23 AM on August 5, 2011 [1 favorite]
Generally gains come slowly and losses come quickly. When you see a 20% gain happen over the course of 6 months or so, you have to expect that at some point there's going to be a point where you see a 10% loss. That's just how it works, if there were never big losses like this once in a while you'd get 30% per year returns instead of 10% per year returns or whatever. The point is that on average, prices go up slightly more than they go down, even though it's extremely difficult to figure out which way it's going to go at any given time.
If it's all going to disappear anyways, why not buy a new Macbook Pro, an iPhone & a surf board?
You sound a lot like the people who drained their bank accounts earlier this year because they thought the world was going to end on May 21. It's extremely unlikely that a completely unprecedented total global financial apocalypse will happen any time soon. Even if you are correct that we are headed toward a huge crash, huge crashes do not tend to magically free people from their debts.
An alternate - look around for banks which passed the stress test or did well enough and shift your account there.
Thanks to FDIC insurance you don't have to worry about your bank going under. Plenty of banks failed during the last financial crash, and nobody within the FDIC limits lost any money from any of them.
posted by burnmp3s at 7:23 AM on August 5, 2011 [1 favorite]
Unless you're prepared to declare personal bankruptcy and lose any credit you may have, taking on more debt that you can manage is a stupid idea. Countries defaulting doesn't mean you don't have to pay your bills.
The WORST time to sell stocks is when the market is down. This is a great time to be buying.
If you can't handle 20% swings in the stock market then your money should be somewhere else. You need to know your level of risk aversion. It sounds like you shouldn't be investing in stocks. Find something less risky, eg: put it in a savings account or bonds.
posted by blue_beetle at 8:03 AM on August 5, 2011 [1 favorite]
The WORST time to sell stocks is when the market is down. This is a great time to be buying.
If you can't handle 20% swings in the stock market then your money should be somewhere else. You need to know your level of risk aversion. It sounds like you shouldn't be investing in stocks. Find something less risky, eg: put it in a savings account or bonds.
posted by blue_beetle at 8:03 AM on August 5, 2011 [1 favorite]
Response by poster: I figured it was probably a bad idea, but with the way Greece is heading and what is happening there, I thought maybe there's a shot at some free stuff.
I've done investing in the stock market before, now is a great time to buy, any sector's you'd be looking at if you were me?
posted by snow_mac at 8:50 AM on August 5, 2011
I've done investing in the stock market before, now is a great time to buy, any sector's you'd be looking at if you were me?
posted by snow_mac at 8:50 AM on August 5, 2011
The best assets in tough times are friends and skills. Make and learn both. If the economy tanks, my friends and family can live with me, and someone has health care skills, someone has tech skills, etc. So I don't have to go to the doc and spend $$, because my friend can do basic health care support, and my other friend can fix the car, etc. On the personal economic scale, that's really efficient.
posted by theora55 at 12:05 PM on August 5, 2011 [2 favorites]
posted by theora55 at 12:05 PM on August 5, 2011 [2 favorites]
if you are extremely good with money and super disciplined, it MIGHT not be a horrible idea to max out your Stafford loan availability and have that money as a personal emergency/opportunity fund for the next 5-10 years (not an Iphone, surfboard, Coachella fund!!)
Interest rates on subsidized loans are pretty decent and IBR makes payment not terribly onerous for most. Also, if you end up working for a nonprofit or gov't agency, you may qualify for early forgiveness which is a huge bonus.
if you can't honestly say you are good with money and super disciplined, forget it.
(And NEVER EVER mess with private student loans...)
posted by screamingnotlaughing at 11:26 AM on August 6, 2011
Interest rates on subsidized loans are pretty decent and IBR makes payment not terribly onerous for most. Also, if you end up working for a nonprofit or gov't agency, you may qualify for early forgiveness which is a huge bonus.
if you can't honestly say you are good with money and super disciplined, forget it.
(And NEVER EVER mess with private student loans...)
posted by screamingnotlaughing at 11:26 AM on August 6, 2011
This thread is closed to new comments.
Realistically, if there's any chance of salvaging the system, governments and capitalists will recoup their losses from their constituents, so if anything, you will end up covering their asses.
posted by Rube R. Nekker at 10:04 PM on August 4, 2011 [3 favorites]