Article: "Saturated Markets"

Discussion in 'Politics, Religion, Social Issues' started by Desertrat, May 25, 2005.

  1. Desertrat macrumors newbie

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    #1
    http://www.whiskeyandgunpowder.com/Archives/20050519.html

    An interesting read about how industrialization has led to consumerism.

    In part:

    "According to Tomkins, for most of human history the majority of people "suffered poverty, malnutrition and disease, had almost no possessions and were dead by the age of 40. Living standards went up and down over the centuries but showed no progressive improvement. Want was the natural human condition and the need to overcome it was a deeply ingrained instinct."

    Then came the Industrial Revolution and, with it, undreamed material progress, which brought even ordinary people comfortable homes, plenty of food and clean water, shopping and entertainment, transport, healthcare and education, and longer lives. According to Tomkins,

    "...it also, of course, brought satiety. But this could never be admitted. Think of the implications! Without demand for ever more stuff, there would be no economic growth, company profits would stagnate and progress as we know it would cease.

    "So we invented the consumer society to generate new desires for things we never knew we needed. Jimmy Choo shoes, rainforest adventure holidays and pyjamas for our dogs. Deep down, though, I think all but the poorest of us know we have enough. Indeed, many [of] western society's problems - obesity, traffic congestion and the agony of choice - now arise from surfeit rather than want.

    "My proposition is that it is one of the most powerful undercurrents influencing business and society today. For business, the notion of satiety is downright scary. During the industrial age, all you had to do to make shedloads of money was invent something useful - the lightbulb, the motor car or washing machine - and sell it at an acceptable price.

    "But by the late 20th century, markets for most such products were nearing saturation and it was becoming difficult to find any further unmet needs. True, new technology is producing new toys - the iPod, the BlackBerry and the Sony PlayStation Portable - but for many manufacturers of consumer products, satiety is an alarming reality. Their response has been to present consumers with ceaseless novelty. Perpetually reformulating and repackaging their products, extending the range with new variants, flavours, and colours or extending the brand into other product areas."


    I guess one could go from the obvious truth of this to an argument about whether or not TV programs affect behavior. Certainly, the ads do.

    Granted that I do a lot of my own repairs on cars and equipment. That means a much longer time between any replacement need. But I've never really understood the perceived need to replace a perfectly good car every three years. As to TV ads, my question has always been, "Why do people believe that BS?"

    :), 'Rat
     
  2. Xtremehkr macrumors 68000

    Xtremehkr

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    #2
    I got this in an email the other day, thought it was funny.

    Basically 'Rat, I don't disagree with what you are saying. In fact, I agree with you, until we get to the finer points about what is needed for society to remain free and fair for all involved.
     
  3. mactastic macrumors 68040

    mactastic

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    #3
    Can't say I disagree with what you posted either 'Rat. But the devil's in the details as we all know.

    Humans have had a rapid change in their living standards over a very short time frame. Perhaps their have been some unintended consequences of our rapid rise.
     
  4. Desertrat thread starter macrumors newbie

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    #4
    "...what is needed for society to remain free and fair for all involved."

    Well, sure. And it doesn't matter whether or not we disagree on how that should be made to happen.

    But I'm not sure that I'd call this society all that free, given the amount of control over people that has come about just in the last forty years. The War on Drugs, the RICO act mis-applications, and now the War on Terror with the TSA and its gropers-in-training...

    Doesn't matter: If the society as a whole goes broke from spending more than it earns, then what?

    Somewhere back in the '70s, BuSpeak came up with "negative savings", meaning "deadbeat", really; one who spends more than his earnings. And we have the term "instant gratification" as well as "shop 'til ya drop". And the national savings rate is damned near zero; some claim it's a negative number.

    I've spoken before of "sub-prime borrowers", those who get home loans but only under nowaday's lowered standards, not the higher standards of yesteryear. The Daily Reckoning claims that the banks state some 68% of California home loans are for interest-only monthly payments. What happens when 1. Interest rates rise; and, 2. The end of the interest-only period arrives and the borrower is called upon to begin principal payments?

    An awful lot of the spending in our consumer economy, right now, comes from people who've sold inflated-price houses and moved to lower-priced areas. What happens when that money starts to dry up? They've bought the new home, paid off the credit cards and the car(s) and now they're gonna live quietly...

    Is this overall package called "lifestyle" NOT scary? And income tax receipts are down, I read, due to all these changes in wage scales I've spoken of in other threads. Now, income tax is some 25% of the total federal take, but I'd bet that other receipts are probably down or headed down. What does that do to the deficit?

    Look. As a child of the Great Depression, I've done a lot of "insurance" against hard times in my own old age. The ant vs. the grasshopper thing. But I worry about those who are 40 or 50 and younger. Yeah, we've had some wars and some recessions, but en masse this country has had a serious case of Life: Soft And Easy! for one helluva long time.

    Consumerism just flat-out does not strike me as a Wise Thing.

    Aw, well. Let's hope I'm just an Old Fart who's nattering away and this will become The Best Of All Possible Worlds.

    Trouble is, if you go back to that URL and check out the more recent archived article, about Snow vs. China and then scroll down about the economic situation in England...

    'Rat
     
  5. Xtremehkr macrumors 68000

    Xtremehkr

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    #5
    The fine points matter.

    I would call this a lack of financial education that among other things is not taught well in our ever declining education system.

    What is encouraged is this kind of outright consumerism, made possible with easy credit.

    Financial disaster is learning the hard way.

    Functional education is damn good prevention.
     
  6. takao macrumors 68040

    takao

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    #6
    perhaps it has to do with credit card etc. the simply possibility to spend money you don't have easily .. and the big problem with that is thats pending habits are somehow learned from your parents

    and many people somehow don't realize that can can limit their bank (withdraw money) cards additionally so that they can't withdraw more money than they have (like i did with my giro-bank account)

    it's not like some "unlimited cash" thingy many peopleseem to believe

    (at least the saving rates are better in austria but debt is on the rise especially thorugh mobile phones etc.)

    personally i've only got around 4000 thanks to my parents because it's somehow tradition that every kid gets a "saving up plan thing" (german:"bausparvertrag" no translation for that) which is even supported with some additional money from feds, if you save up at least 1000€ per year you get the maximum of 50€ additional to the percentage.
    and i think you get an additonal fed support money if you use that money for buing a house or flat or something
     
  7. mactastic macrumors 68040

    mactastic

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    #7
    Well I can provide some insight into the California issue. It's a straight gamble that many people are making that they will be able to sit tight for two years with an interest-only loan, then be able to turn around and sell for 50k to 100k more than they paid. And yes there are a lot of desperate people who will get fully reamed when interest rates rise, in no small part due to the high costs of housing to start with here. But a good number of people are playing the high-risk game and making out like bandits so far.

    I'm guessing that my first house purchase will be under something like a 40 year jumbo mortgage. But if I time it right I'll buy into the crappiest house in the nicest neighborhood I can find, and spend the minimum two years fixing the place up real nice. Then I'll sell and hopefully make enough off the sale to move down to a 30-year mortgage and try again. I can sure do it for a lot cheaper than Joe Homeowner can.

    On a side note, our median house price just blew past $500K recently. When I moved here in 1998 the median was right around $200K. So what's that, a 150% return over an eight year period? Meaning that through the Bush recession people have been pulling down close to a 20% ROI annually in this area on housing investments. Other areas are similar. It's no wonder people will do whatever than need to to get in on this racket.
     
  8. Desertrat thread starter macrumors newbie

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    #8
    mac, I just had a phone call from a buddy who was talking about that very issue of the "betting on the come" about a continued rise in price within the time limit of the interest-only payments. While California has the most notoriety about this, it's a (spotty) nationwide phenomenon.

    One trap in all this is the rules/regs for commercial lenders, instituted in the late 1970s/early 1980s. If the value of the collateral of a loan falls below the outstanding balance, the lender can call for a cash reduction of the note. It doesn't matter if the borrower is making payments on time. The borrower must still have the cash on hand to reduce the note's balance to some point below the collateral's new and lesser value. Don't have the cash on hand? Deep doo-doo.

    That's why all the repos in the mid-1980s. Then, banks wound up with all these apartment buildings and houses and their loan portfolios then had too-high a percentage of "non-performing loans". At that point, the FDIC stepped in and took over the bank. The FDIC sold the repossessed assets for whatever the market would bring, and the US taxpayer picked up the rest of the tab.

    The obvious question is, where are we on this curve of prices vs. time? Part way up? Near or on top of it? The only guarantee is that there will be a top.

    'Rat
     
  9. mactastic macrumors 68040

    mactastic

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    #9
    Well like I said, we're holding steady at about 20% RIO annually. I don't see (at least in my area) housing being worth LESS than what people are paying for it now anytime soon. Will the growth rate slow? Sure (and I surely hope it does, the affordability index is now down to 1 in 7) but I don't see it going in a negative direction unless the world economy goes to hell. People always want to live by the coast, right?
     
  10. kuyu macrumors 6502a

    kuyu

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    #10
    Couldn't agree more. I'm two classes from a BBA in finance. The problem is that most people think that they understand it already. I barely understand the financial universe, and I've been studying nothing but for 2+ years.

    Too many Americans read one news story about the falling dollar or the housing bubble, and assume that they are now experts on the subject. How hard would it be to have one unit in high school about compounding interest? Hell, $5 a day will make you a millionaire in 25 years. Start when you're 18, live off interest in your mid 40's.

    My major beef, however, isn't with investment ignorance. Rather, it's with corporate ignorance. Most of the truly "anti-corporate" types wouldn't know the difference between sub-chapter S and c-corp. They incorrectly assume all corp's are automatically evil (except for apple, they're cool ;) ).

    Don't get me wrong, there are plenty of things about corp's that piss me off, but their mere existance is not one of them. Tim Robbins's puppet in Team America summed it up best when he said "the corporations sit there in their corporation buildings, and they're all, you know, corporationy. And they make money. Hmm."
     
  11. mischief macrumors 68030

    mischief

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    #11
    Personally I'm all for tending my crops and keeping out of idle ruminations... And of course not having doors slammed in my face by twirling sufi's. ;)
     
  12. tristan macrumors 6502a

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    #12
    D'rat - your original article reminds me of a Peter Drucker article i was reading yesterday that said that the reason that people assumed that class warfare was inevitable in the mid-1800s (for example Karl Marx) was that they didn't see how increases in worker productivity would end up making a decent salary possible for the majority. Worker productivity is responsible for everything from the Allies winning WWII to the creation of the middle class to retirement to the rise of the pension funds.

    When you have productivity, you can generally get a higher income, and with that income, you can either: invest, consume, or give yourself more liesure time. Madison Avenue wants you to consume, but Wall Street wants you to invest. Nobody really wants you to give yourself more leisure time, but that's a good option for most stressed out people, and my preferred one. (Though my leisure is work-oriented.)

    Incidentally, the mistake people are making with the housing market is thinking that housing is both a way to consume and invest - have your cake and eat it too. I personally don't even think that housing should be owned by individuals, and that our tax code is irresponsible for encouraging people to borrow 10x their salary at to invest it on an asset that, given stable mortgage rates, shouldn't increase more than 3-4% a year.
     
  13. anonymous161 macrumors 6502

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    #13
    ??
    If I want to own anything, it's my house.
    My only thought is that people should focus on owning more of their house than the bank does.
     
  14. zimv20 macrumors 601

    zimv20

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    #14
    indeed! i own about 2/3 of mine now.
     
  15. tristan macrumors 6502a

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    #15
    Real estate is a rotten asset for people to own. It has high transaction costs. The value fluctuates with mortgage rates. The market goes hot and cold. It's expensive to maintain and a hassle to rent. In a stable rate environment, it shouldn't go up more than 3-4% a year, yet the average mortgage is 7% a year. Generally it only rents for about 5%, and insurance, property taxes, and maintenance run about 2%. At best, it's an inflation hedge.

    It's only saving grace is that it can be financed for 20% down, 10% down, and nowadays, maybe nothing down. And it's tax deductible. These characteristics turn an otherwise lousy investment into a pretty good one, especially when interest rates are falling or when demographic patterns are changing. But there are hidden costs to society.

    First, lots of leverage means lots of risk. If there were a multi-regional speculative bubble in real estate (as many suggest there may be), and prices dropped 20%, millions of people would be wiped out, and banks could even collapse. It could literally bring down our entire financial system and turn us into a Japan - ten years of recession. (People don't realize how close we came to this in the early 1990s.)

    Second, it diverts capital from more profitable investments. People invest $100k in a second home for the tax breaks, when they could be investing it in a mutual fund. This leads to an oversupply of housing, construction, mortgage, etc, and an undersupply of other types of businesses.

    So yeah, you should own your house, and when prices fall, I probably will too. (I sold mine a couple years ago.) But I think society would be better off if housing were owned by big property management companies rather than individual investors.
     
  16. zimv20 macrumors 601

    zimv20

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    #16
    i see what you're getting at, but i think your conclusions are wrong. the issues seem to be centered more on people taking on too much risk and the banks letting them.

    personally, i'm in good shape with my home and feel i have every right to own it and the land on which it sits.
     
  17. takao macrumors 68040

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    #17

    well at the end of the 20ties and 30ties of the last century an aunt from my grandmother tried the same thing with selling her house and investing etc.

    needless to say she came out homeless and broke untill 1935 and then was living the the house of my grand grand mother etc.

    the depression of that time pretty much cemeted the Vorarlbergian attitude "schaffa schaffa, hüsle boua" (dialect: badly translates to "working working, building a house")
    heck ask kids and teenagers what their long time plans are etc. and you wil lget "having a house as answer"

    that attitude alone drives ground prices up extremly ... out side of the bigger cities and the skking tourist regiosn nowhere else in austria prices are _that_ high ...


    personally i'm renting as well but i'm a single student and don't have a fixed income or anything ... as soon as i finish my education and get a job somewhere i'll start up saving money for my own 'home'
     
  18. tristan macrumors 6502a

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    #18
    What's wrong about my conclusions? If you had to put down 50%, and you didn't get a tax break, would you buy a house? Would you consider the investment? Or would you just max your 401k and put the rest in mutual funds? The current situation (high LTV loans, tax breaks) rewards both individuals and financial institutions for taking on risk.

    You have every right to own it. But do you have the right to a zero down payment loan with secondary guarantees by the FDIC/FNMA and a tax break that could potentially let you shelter millions of dollars of taxable income over your lifetime? Well, right now you do. Should it be that way? Probably not.
     
  19. zimv20 macrumors 601

    zimv20

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    #19
    it remains that the most compelling thing about buying a principal residence is that one pays into the property in one's own name, rather than paying an expense with no chance of investment.

    well, i do both. and because interest rates are so low (compared to longterm market performance), it does make sense to keep a mortgage and leave the rest in the market.

    however, i've not achieved 2/3 ownership by paying down my loan that much, most of that is property value increases. without going into details, the housing market would have to tank an incredible amount before i'm upside-down on my mortgage.

    i agree that's a problem.

    if this was an aspect of your argument earlier, i wasn't aware of it. as a taxpayer, i do not want to fund the recovery of idiots. how should i rectify your previous statements of denying home ownership with the above? do you mean restricting to only those qualified, or restricting it from everyone? when i said i disagreed with your conclusions, i'd thought you meant the latter.
     
  20. tristan macrumors 6502a

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    #20
    Sorry, I kind of skipped ahead. Here's my reasoning:

    If homeownership weren't so heavily subsidized, but had to compete with other investments on equal terms, then we probably wouldn't have this cult of "let's own my own home" because people would look at the numbers and pass. In that case, economies of scale would probably lead to big, fairly efficient property management companies handling all of the leasing. You would get a better rate of return/risk by buying into a fund of these companies (by providing either debt or equity financing) then you would by buying or building individual properties. Competition between these companies would drive down the cost of renting. Cheaper rent means more investment capital available. That's the way i look at it - admittedly speculative, but I think it would make more sense then the system we have in place now.

    BTW in theory, you could buy index funds with 90% leverage, take the interest deduction, and crush any return you'd get in the housing market. Only problem with this is a margin call will wipe you out of the stock market, but temporary underwater housing prices will *not* wipe you out of the housing market.
     
  21. zimv20 macrumors 601

    zimv20

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    #21
    yes, but...

    home ownership (as a place to live, not as an investment practice) can be a very good thing even outside the numbers. it provides a sense of place, a sense of pride, continuity, etc.

    w/o sounding too cheesy, it is one of those things associated with the american dream. so in that regard, i think it _is_ special. i'd say people tend to get more warm and fuzzy about owning their own home than in, say, owning shares of a particular stock (AAPL aside :)

    so i guess what i'm saying is that home ownership is important to community and society, and it should be encouraged, up to a point (including the kinds of risk factors mentioned above). allowing the interest as a deduction is a fair kind of encouragement, i'd say. plus, it allows people to diversify investments.

    and there do exist Real Estate Investment Trusts. i used to invest in one (made my target profit and cashed out).

    finally, home ownership lends itself towards long term investment (not always, but...). e.g., i've been in my home over 9 years, two of my neighbors longer than that. my mom still lives in the house i grew up in, my grandma lives in the house my grandfather bought after returning from WWII. i think such long term investment is good, even if it is accidental.
     
  22. pseudobrit macrumors 68040

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    #22
    Krugman weighs in.

    The whole thing is an important read, but here's the bit that stick out most to me:

     
  23. tristan macrumors 6502a

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    #23
    I can' read the article (password protected) but I have heard the statistics - they're frightening. I can't buy stocks with less than 50% down, but I can buy a house interest only.

    zim - what about the flip side? I prefer to rent - I'm recently married, plan on working in a couple other cities and having kids in the next ten years. Obviously, my residence needs will change dramatically. I have been thinking of buying a vacation home, just for the tax deduction. I would rather invest in equities - I don't need a vacation home, or even want one all that much, and don't even consider it a great investment, but if I do buy one, I could save literally a hundred thousand in taxes over the next ten years. On the other hand, prices could fall and wipe out one hundred thousand of equity. And the bigger the house I buy, the more I'll save on taxes - or lose if prices fall. And if prices do go up and I take a home equity loan, I can save even more on taxes - and go deeper into debt. Should the tax code be encouraging me and thousands of other people to make investment choices like this? Isn't it just encouraging risky behaviour and diverting investment capital from more profitable uses?

    A rational way to encourage homeownership would be to just give someone a $10k tax deduction for owning their primary home. That would discourage people from overbuying and overborrowing. Of course if they changed the laws now, the economy would collapse.
     
  24. mactastic macrumors 68040

    mactastic

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    #24
    Tristan - Try BugMeNot. Big help with these types of sites.

    I'd like to see more encouragement in buying the house you live in and maybe one other, but beyond that have it be a wash for investors. It would help protect cities from over-inflated real estate value and all the problems that brings.

    However, for the reasons zim puts forth, home ownership should be encouraged by the government. The government has an interest in neighborhoods that are stable and where people have pride in and care for the properties they live on.

    I rent right now too, and can see any number of home improvement projects that would slowly make this place from a nice rental to a spectacular ranch home. Most projects could be done for well under $5000 and a little elbow grease. But as a renter, what incentive do I have to do anything to this place? Anything permanent that I build violates my lease.
    Anything temporary is a waste because it won't work right in the next house so I get no value for it. The owners also have little incentive to do more than maintain it in it's current (very '70's ;) ) condition. They would see a gain if they fixed it up and sold it, but they can't rent it for much more without adding another room or something. So this house will sit like this until the ranch gets split up and sold, it ceases to be a rental and someone buys it with an eye towards fixing it up at great expense.
     
  25. zimv20 macrumors 601

    zimv20

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    #25
    certainly, home ownership isn't for everyone, such as for the potential relocation reasons you've cited. i'd heard several times that the rule of thumb is 3 years -- buy only if you plan on staying 3 or more years.

    w/ a looming housing crisis, i suspect that number has increased.

    i'm not sure if we're talking about principal residence or investment property. afaik, those nice mortgage deductions count only for the former.

    i don't see people taking on bigger mortgages just to get the deduction. is that happening? i see people always trying to get the lowest rate.

    rather, i think people try to buy the biggest house they can afford, and in their preferred area, and that's the driving force behind the bigger loans. again, it's up to the lending companies to properly assess risk here. i know only a handful of people (myself included) who bought a smaller house than they were qualified to buy.
     

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