Beware the ‘Buyback Economy’

https://www.washingtonpost.com/business/economy/beware-the-mother-of-all-credit-bubbles/2018/06/08/940f467c-69af-11e8-9e38-24e693b38637_story.html

by LarryDarrell • 8 years ago

141 124 8 years ago

washingtonpost.com

jonknee9• 8 years ago

I think this is much ado about nothing. Companies get killed for cutting dividends, so doing buybacks are a good way to create value for shareholders in a manner than can be ramped up and down. It's also more tax efficient (I pay taxes on dividends, but don't pay taxes on owning an ever so slightly larger piece of the company).

The author picks on Apple, but doesn't mention that Apple has dramatically increased its headcount and R&D spending all the while buying back stock. The truth is Apple is a mature company that is an incredible money making machine, they literally don't have ways to use the profits to make more successful tech products. What else should they do other than reward shareholders?

Anyway, if it turns out when I sell my shares they were bought by the company, guess what I'll do with the proceeds? Either spend it (stimulating the economy) or plow it back into other investments. Buyback money doesn't magically disappear, it just cycles what the capital is being used for.

asdsa5325• 8 years ago

Yep, Apple also has tons of cash reserves, so taking on debt doesn't really matter for them.

jonknee9• 8 years ago

And they were taking on debt as a work around for double taxes on foreign income. At crazy low rates because they are not a credit risk whatsoever. It was basic accounting.

iaabtpbtpnn• 8 years ago

They could fix the damn MBP keyboard...

jonknee9• 8 years ago

Maybe they can buy them back!

Scoundreller• 8 years ago

On the tax side, I enjoy being able to time my gains/losses, instead of paying taxes every year.

Also, as a foreigner, I have tax withheld by the IRS on US sourced income, but I do not on capital gains (except through my retirement account due to tax treaties).

aczerepinski• 8 years ago

Buybacks often don't creat value for shareholders though. When a stock is trading for more than its intrinsic value, buybacks destroy value.

Buffett/Berkshire is literally the only example I can think of where they only buyback shares when prices drop below a certain threshold. Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.

slededit• 8 years ago

You could argue the market is efficient and therefore always trades at the intrinsic value - on average. This view has more following among economists. Although if your CEO happens to also be the most legendary stock picker of our time then I'd let him time the market.

jonknee9• 8 years ago

Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine.

Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.

skybrian2• 8 years ago

Returning money to shareholders doesn't create or destroy value; it just moves it. No money is created or destroyed, and nothing else changes either. Whatever intangibles the company has are still there.

fragsworth• 8 years ago

Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.

Do you have evidence of this? Shareholders vote on what to do with the corporation's money. I would expect the vast majority of those decisions to be rational.

AppleseedJenny• 8 years ago

When a stock is trading for more than its intrinsic value

If that is a shareholder's opinion, they should sell the stock.

TangoTrotFox• 8 years ago

The reason buybacks are disconcerting (aside from the debt driven buybacks the article focuses on) is precisely because of what you're saying.

Buybacks are often a signal that a company has run out of ideas for what to do with with their money, other than what they're already doing. Especially for a tech company, that's a very bad sign. For instance you refer to Apple as a mature company yet the interesting thing is that today they are basically 'the iPhone company' - making the wide majority of their profits from a product type that didn't exist 11 years ago. And this is a typical pattern with tech and electronics. Times and trends change very quickly and the winner tends to be the company that's on top of the change. If Apple doesn't manage to move beyond the iPhone they will stagnate (which is arguably already happening) and inevitably decline.

gaius4• 8 years ago

they literally don't have ways to use the profits to make more successful tech products

And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. If they are really bereft of ideas, spending a few billion on fixing bugs (instead of the animated poop icon) might keep them occupied until inspiration strikes

compcoffee4• 8 years ago

And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly.

But these are subjective measures (to which I happen to agree with you). It's not as if they aren't investing in their products.

burlesona• 8 years ago

Apple - and much of the hugely profitable tech sector - is probably a bad example to pick on. It’s worth noting, though, that the corporate leverage the author is concerned about is widespread among all business sectors.

Personally I worry a bit that we’ve run into a sort of soft ceiling on the economy where the biggest moneymakers are causing creative destruction via software (Intuit to Accountants, Uber to Cab Drivers, etc) but that we aren’t seeing the kind of widespread real economic growth (ie productivity gains) with these shifts that historically accompanied waves of industrialization. The pie isn’t growing as much as certain players are finding ways to expand their slices of it at the expense of others.

Perhaps the above is true, perhaps not, I don’t know. But it seems to me that the entire system we have is predicated on steady macroeconomic “growth” to function. In one way or another we all depend on the stock market to climb about 10% a year so we can retire some day and have savings to live off of, etc. And when that growth isn’t happening via the old mechanism of expanding industry with solid jobs and wage growth, then Wall Street and the White House resort to tricks (new financing mechanisms, tax cuts, spending, etc) to keep the machine running.

The sense I get is that since about 2000 we’ve just been playing different games to try and get the old mojo back, and that the nature of such games is to work for a bit and then collapse due to unsustainability. Maybe that’s just my tinfoil hat coming out, I hope I’m wrong.

Clubber3• 8 years ago

That's one of the primary reasons we haven't really cut back on military spending since the end of WWII. WWII military spending got us out of the depression, no one knows what will happen if we suddenly or gradually stopped. Considering that, we've been playing some sort of game since at least WWII and probably since FDR got elected.

allcentury• 8 years ago

I think that's mysnomer https://www.forbes.com/sites/peterferrara/2013/11/30/the-gre...

JoshTriplett3• 8 years ago

In one way or another we all depend on the stock market to climb about 10% a year so we can retire some day and have savings to live off of, etc.

One critical detail here: 10% is definitely not sustainable. Long-term, the market reliably provides about 4% after accounting for inflation. You shouldn't assume you can get any more return on investment than that.

droidist2• 8 years ago

True, I always heard 7% and I think that's before inflation, so 4% sounds reasonable.

quickthrower2• 8 years ago

Why is 10% not sustainable, but 4% is?

ArekDymalski• 8 years ago

we all depend on the stock market to climb about 10% a year

Can anyone point me to any scientific reasoning behind this? As I'm not an economist, I was always baffled by an expectation that the market will always grow. That instantly brings to my mind the comparison to cancer.

xapata• 8 years ago

Purely based on empirical observation. The rate of growth is actually quite bad for capitalism in the long run, as it's unsustainable. See Piketty's inequality.

As capital agglomerates, it creates instabilities. When a large capital cluster collapses, if it's too big the collapse has systemic impact. If everyone is small, an individual may experience greater risk, but the system is robust.

In reply to the other comments: Economic growth is different from stock market asset appreciation.

jonknee9• 8 years ago

It's a byproduct of having more people and more productivity every year, you don't need large amounts of either for it to compound.

(And you don't need 10%, a lot more money is in bonds than equities and at much lower rates.)

Something1234• 8 years ago

Not a really economist, but...

The general idea is that there will be dips and bubbles, but over the long run, Growth will happen.

In general, we need to make things better. When we make things better we create growth.

mhb• 8 years ago

That instantly brings to my mind the comparison to cancer

Why not bamboo?

dboreham2• 8 years ago

"Expect that" is not quite the same as "depend on".

jadedhacker• 8 years ago

The stock market also grows typically above GDP growth as well (in the short term).

https://www.quora.com/How-can-the-stock-market-grow-faster-t...

EDIT: Unless people actually sold their stocks instead of holding in which case it'd be GDP.

tremon• 8 years ago

I've always considered it as self-fulfilling prophecy, like Moore's law. There is (was) no inherent reason for the semiconductor market to grow like it did, but the simple prediction, coupled with competitive pressure, made every player in the industry work to match the prediction for fear of falling behind.

maxerickson• 8 years ago

The reason productivity doesn't go up is that it is decoupled from jobs. Some things are wildly productive and produce a few jobs and some other things aren't very productive but employ lots of people.

So sustainability of growth isn't particularly an issue (the economy quickly grows to meet new demand, essentially instantaneously), the problem is that it is becoming more difficult to participate meaningfully in the economy (when lots of people do that you get demand growth).

eli_gottlieb• 8 years ago

The reason productivity doesn't go up is that it is decoupled from jobs. Some things are wildly productive and produce a few jobs and some other things aren't very productive but employ lots of people.

Well, that sounds like we have two large problems to solve:

1) Effective demand/participation, the "jobs thing" everyone talks about.

2) The underlying cost diseases that force huge amounts of labor to be employed at low (sometimes even negative) marginal productivity.

bb886• 8 years ago

So the recent surprise of the last few years was Thomas Piketty's "Capital in the 21st Century"[0]. He argues that return on capital investment will generally outpace growth, and that these patterns we see now, we have seen around a century ago. The rate of investments has been historically 5% where as a good growth rate for the US recently has been 3%.

The difference between those numbers is why inequality grows.

[0] https://www.economist.com/the-economist-explains/2014/05/04/...

pesmhey• 8 years ago

Could you point me towards any discussion that’s been had about using those numbers to shape economic/monetary policy?

gaius4• 8 years ago

The sense I get is that since about 2000 we’ve just been playing different games to try and get the old mojo back

I would concur. The global economy never actually recovered from the dotcom crash. Since then it has just been papering over the cracks, inflating property, artificially low interest rates, “quantitative easing” i.e. just printing money that’s not backed by anything in the real economy. The correction when it comes will make the dotcom crash and even the 2008 crisis seem mild.

candiodari2• 8 years ago

If you're going down this path then perhaps it's worth pointing out that the only long-term improvement of the economy possible is productivity improvements. Everything else is financial engineering which is artificial and cannot last. Productivity is roughly a measure of how much an individual can accomplish for a company.

(Real, meaning subtracting inflation) productivity improvements stopped in 1980, and have been going downhill ever so slightly since. Productivity today is actually a bit lower than, say, 5 years ago. People do less. Now this needs to be measured in real growth to see this effect (although, in the last 6 years or so, even productivity growth without inflation is negative). Attempting an analogy to make it maximally real: essentially, if I have you work for me (as 1 more employee), how many big macs can I sell extra ? The answer, say, was 800, 10 years ago and now it's 700.

Meanwhile, all costs that productivity needs to carry have been steadily increasing, which can be roughly expressed as "per worker, how much needs to be supported ?". For Europe, especially this is very bad (frankly, it is very, very bad for everywhere except the US where it is merely dismal). Essentially, whereas in 1980 every individual working needed to support the life of 1.8 persons, most of them children (who will support others when they grow up), now it's 2.3, most of them elderly (who's main contribution in the future to the economy, as dismal as it sounds, is dying).

This is generally referred to as "secular stagnation". It's a huge problem, because, put simply, the total amount of economic activity we can dedicate to any person is essentially productivity. So you can only get a nicer house if productivity goes up.

In my opinion, it is in fact a much bigger process than the generally agreed upon view above. In 1985 or so the world went from (on very large average) demand-driven to supply-driven. Simply said, in 1975, if a baker produced 5 more pieces of bread, people would buy them, eat them, pay for them, and work a bit harder themselves (maybe making some more windows ... or whatever) to make up for it. In 1995, if a baker produced 5 more pieces of bread, they would rot on this shelves. This is what then causes the productivity stagnation.

Another way to put this is that we are demand-limited. People are producing everything they want (which in economic terms means that they are not willing to work harder for more).

This means that while before 1980 we were arguing "how can we produce more cars ?", "how can we get more people flying/traveling ?", all good questions. Now we're arguing "okay, next year, we'll sell less cars, less people will go on holiday. How do we divide up the profits from that ?". Whatever the outcome, I guarantee not many people will be happy with it.

In other words, the problem is (as stupid as it sounds) that we ... as in humanity as a whole, don't have enough to do. We are embarking on a few grand projects, like urbanizing China, but as a whole they don't seem to make a big difference. We should decide on something ridiculously intensive to do, requiring massive infrastructure build, and go out and do it. Maybe colonize the bottom of the oceans (or the top). Fly to the moon and build a base this time. Capture an asteroid. Or how about automated metros everywhere (or just in many places) ? Whatever. But the alternative is that we're going to have a lot of people sitting on their hands (and being very poor and hopeless and maybe even homeless because of it). That seems like a good thing to avoid.

I must confess that while I wasn't rooting for him, I was hoping that Trump's infrastructure plans would accomplish exactly that, at least for America (and they still might, I suppose), but so far not much has happened.

dalbasal• 8 years ago

I think that at least in the fields you mention, the structure of the markets is problematic. Ubers' value to customers is proportional to the number of rides they take, and the usefulness of the service. Ubers'value to investors is not proportional/linear. It's more a function of what Peter Thiel (being intentionally provocative) call "monopoly." He means market share, network effects, moats, lock-in, other aggregation benefits...

We can see this in a lot of the new economy. Google's search business is worth X. A search business with 1/10th of the volume is not worth 10% of Google search's worth nor does it generate revenue on that scale. This is because Google derives its value from aggregating a large portion of the total. More than the sum of parts is an o understatement.

This exists in a manufacturing environment too, the size factor. But, for manufacturing this is "economies of scale" related. Ie, they use price to lower unit costs. In the new economy, it's unrelated to unit costs. The actual revenue (not profit) and market cap effect on the 1+nth unit is higher.

ROI is what actually drives the economy. But, if market caps grow while the "real" economic outputs (searches, rides) do not....

This is why Thomas Pickettys work is so popular today. This mechanic can effectively drive increases in the value of capital, without changes in the real economy.

I think we can see this quite clearly in the capital markets. Market value grows faster than revenue. Capital grows faster than the economy.

acover5• 8 years ago

How do bond ETFs work?

I thought with stock ETFs they were convertible when you had a large number. This would keep the etf price in line with it's underlying assets.

The issue with bond ETFs is I don't think the underlying bond is exchange traded. How would the conversion work?

I ask because this article has reminded me that I should probably diversify away from bond ETFs into GICs

dboreham2• 8 years ago

A bond ETF doesn't hold all the underlying bonds. Someone picks a subset and hopes they track the index.

acover5• 8 years ago

That can't be right. Vanguard lists the bonds that are in the ETF.

tanderson92• 8 years ago

The problem is usually stated in that the ETFs have a lot more liquidity than the underlying constituent bonds. This causes questions about what will happen if the market freezes up even more -- you might find wild deviations of ETF prices from NAV.

mabbo• 8 years ago

My understanding is that there are markets where bonds can be bought and sold. An ETF of bonds is just a large fund holding a set of bonds and trying to keep track of their current value.

Since you know what the return on the bond is, at what price, interest rate and time, you can very easily assess the current value of a bond, especially compared to what you might make if you just bought GICs at the current rate. An interest rate hike today lowers the sell price of bonds purchased at yesterday's rate.

acover5• 8 years ago

I think the market is still brokers talking. There is no centralized exchange.

https://www.quora.com/Why-isn’t-there-a-bond-exchange-equiva...

baybal22• 8 years ago

Stupid move - tax cut was a perfect moment to reduce your debts. These guys did the opposite

bokstavkjeks• 8 years ago

Debt can be a strategic tool for a company. They want to maintain a certain debt-to-equity ratio as eliminating debt would probably be more expensive in the long run than maintaining that ratio. The ratio is, of course, not set in stone and is rather industry specific. The short, sweet, and overly simplified version is that debt provides tax shields and liquidity now. $100 now can be worth more than $120 in five years, so most companies are okay with a certain amount of debt.

baybal22• 8 years ago

But not now. Find a major company that is not critically overleveraged thanks to near net negative interest rates few years ago. Now there is a chance that effective rates will go all the way to eighties era numbers next decade, and the next debt crisis may also be close.

bb886• 8 years ago

Mods, title should reflect the actual title of the piece: "Beware the 'mother of all credit bubbles.'"

useful• 8 years ago

Weren't loans taken out as a way to avoid taxes pre-2018? You could have profits stored offshore tax-free and take a loan out in the US that generated money for your US operation without incurring taxes. These loans are very low interest rates and companies still don't have incentives to pay them off.

mathattack• 8 years ago

When companies cease to have productive things to do with money, it’s time to return it to shareholders who can invest it elsewhere. In principle this is the natural way of the word.

This is complicated by tax laws which allow companies to write off debt. This helps create lower risk debt capital but increases the risk of the remaining equity. Not the end of the world. Just invest in both.

I’m somewhat concerned by companies borrowing too much and dying, but creative destruction helps new entrants.

rectang• 8 years ago

Since buybacks increase concentration of ownership, do they tend to combat the short-termism of uninvolved, absentee shareholders? Or is there no consistent pattern?

ggg99902• 8 years ago

Crazy to think that just $210 billion can buy you 480 companies in the S&P 500. China could easily do that.

tedsanders2• 8 years ago

It can't. $210 billion can buy you any one of 480 companies in the S&P 500.

Buying all of the S&P 500 would take roughly $24 trillion.

The article's wording on that point was very ambiguous and misleading. I had the same reaction! :)

ggg99902• 8 years ago

Ah ok. Makes more sense.

methodover2• 8 years ago

least a third of the shares are being repurchased with borrowed money

What?!

That is insane. Right? Like I know I’m just a lowly programmer who doesn’t know jack all about finance, but I thought the whole point of a buy back was that your public company was flush with cash and instead of spending it on capital expenses (am I using that word right? I mean things that grow the business, like say, Facebook buying Instagram) you spent it on buying stock from shareholders.

What the heck is the point of a buy back purchase with debt?! I really don’t understand.

If the article explains it and I missed it, it would be awesome to have it pointed out.

iamforreal• 8 years ago

I'm extra confused because I thought in some sense stock was the collateral (or at least a component of collateral) for said debt.

marticode• 8 years ago

Sometimes the company can make better use of it's existing capital by using debt (especially when debt is cheap as it is now). This means it has more capital than needed - so it returns that capital to shareholders using buybacks and finances itself through issuing debt.

roenxi• 8 years ago

For the record, I also think it is an insane practice and would personally take the buyback as an opportunity to sell. That being said, here is a view from which it might make sense:

0) Assume that there is an optimum debt/equity ratio for a company (no idea how it shakes out in practice, but there is probably some rule or theory that suggests an optimum debt level, like the Kelly Criterion suggests an optimum quantity to risk compared to available capital).

1) The accountants have calculated that due to the difference between your return on capital and the market interest rate, you should have borrowings equal to 20% of your shareholders equity.

2) The company's shareholder equity grows organically because it is doing well.

3) The company wants a higher debt/capital ratio, and investors are demanding some profit be returned to them, so borrow the dividend money directly and gives it out as a share buyback, optimising the debt/equity ratio at the same time. This is an administratively neat way of getting the money for the buyback together in one place.

There is a fuzzy spot in the argument in that you are returning money to investors at the same time as your return on capital is better than the market, but stranger decisions get made. CEOs and investors don't complain about high stock prices.

gtycomb• 8 years ago

There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you.

Or it may be that the big wigs looks around asking, where is the best place to invest in stocks...who else, but me! This show of confidence in the future performance of your company can be good marketing for your own stock value.

compcoffee4• 8 years ago

There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you.

When you are a public company you've made the choice that you are always for sale.

jonknee9• 8 years ago

It depends on the firm, but Apple is a great example of a company that took out tons of debt to buy back shares (and pay dividends) and it made total sense. The reason was they were holding tons of profits from overseas that they didn't want to pay tax on. Apple being Apple was able to get really low rates on bonds and that turns out to be way cheaper than paying tax and using those profits for anything.

Interest rates are moving up now, but have been really low for a long time. If you pay out a decent dividend it can make financial sense to loan money to buy back shares just on not having to pay the dividend (if you pay a 5% dividend like Ford does, but can issue bonds at 3%, I mean why not?).

There's also the factor that since interest payments are tax deductible, it further pushes the cost of interest rates lower.

tl;dr it usually comes down to tax and accounting reasons.

methodover2• 8 years ago

Ahh, okay. So, it's basically a tax avoidance idea. If my stock buyback costs 20% in taxes on overseas profits, or 10% interest in bonds, then I'll take the bonds.

But wait. Taxes are a one-time thing, right? You pay the 20% (or whatever it is) and you're done.

You're going to have to pay those bonds back sometime, right? Wouldn't you need to pay them off and have to pay that 20% tax rate?

Oh I bet not. I bet there's some tax avoidance trickery that means you pay less in taxes if it's paying off bonds, right?

twblalock• 8 years ago

Businesses use debt as a tool. It doesn't mean they don't also have revenue and cash reserves -- it just means they have calculated they will be better off leveraging debt than spending cash for certain things.

Think about it this way -- if you wanted to buy a car, and you had enough money in the stock market, you could sell your stocks and pay cash for the car. Or, you could get a car loan at a pretty low interest rate. Why would you take the loan? You might take the loan because the money you would make by leaving your cash in the stock market (and avoiding capital gains taxes triggered by selling shares) would almost certainly be larger than the interest you would pay on a car loan. So it might make sense to take the loan and leave your investments alone.

There are not a lot of personal decisions that turn out like that, but a lot of business decisions turn out like that.

polotics• 8 years ago

Businesses != Managers != Private equity sharks. Time horizons vary, debts and buybacks are "in the game"...

im3w1l• 8 years ago

They are doing a similar thing as a bank. They are using their position as trustworthy and reliable to take money from people with low risk appetite (bondholders) and handing it to money with higher risk appetite (stockholders) so they can invest it.

This increases the risk that Apple crashes and burns but (ideally) the increase is low enough that all parties come out ahead.

KMag• 8 years ago

If you have tons of cash from overseas revenues that you have sitting in your offshore subsidiaries that you don't want to pay domestic taxes on, and you can use that overseas cash as collateral for low-interest loans domestically, and you believe corporate taxes on overseas earnings brought onshore will likely be lower in the future, then it makes sense to pay dividends and buy back shares using onshore loans against offshore holdings.

Though, for buybacks, I wonder why the overseas subsidiary doesn't buy shares of the domestic parent. Perhaps that tax loophole has already been plugged.

thisisit• 8 years ago

It is insane. And it is entirely fueled by access to cheap money. Rates for the past decade has been near 1% and only recently started climbing but still below 2%.

I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing. And that means over time these companies can borrow even more money on their "growth". The cycle repeats.

compcoffee4• 8 years ago

I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing

Another oft-repeated trope that doesn't follow in the data. In fact, most of the companies doing the biggest buybacks recently have had underperforming share prices.

Buybacks can be good or bad, smart or stupid, just like any other "investment". Read Damodaran.

tedsanders2• 8 years ago

My thoughts on the content of the article:

(1) According to Ray Dalio's theory of long-term credit cycles, we should be healthiest in the decade after a credit crunch.

(2) When the article says that Apple could use its $210B to buy the bottom 480 companies of the S&P 500, it means any one of the bottom 480 companies. As worded, that sentence is ambiguous at best and deceptive at worst.

(3) I don't understand the author's point that companies with the most buybacks saw their value go down the most. Like, isn't that exactly what you would expect? If Apples gives $210B to shareholders, now Apple is worth $210B less.

(4) No evidence is given for the claim that all of these companies intended to use their buybacks to prop up their stock price. I doubt any evidence exists. Quite possibly, crummy companies like Sears are buying back stock because returning money to shareholders is better than building new Sears stores.

(5) Does it really matter that much if claims on companies' future profits are shifting from risky equity to risky bonds? I honestly don't know.

(6) The article argues that the rise of bond ETFs over the past decade ($15B to $300B, 20x) shows the rise of bonds. But, honestly, most of that comes from the rise of ETFs, not the rise of bonds. Over the same time period, the total ETF market, which is mostly equities, grew from $700B in 2008 to $4,600B in 2017.

(7) A lot these 'one decade ago' statistics are hard to interpret, since one of the endpoints was in the middle of a terrible financial crisis.

(8) The numbers on household credit card debt seem very tragic. I wish I understood more how people use credit cards.

jnbiche• 8 years ago

I wish I understood more how people use credit cards.

I'll give you the low-down: many Americans don't make enough money to save up money for medical emergencies, and other emergencies, so when one of those happens, they reach for their credit card. Yes, it's a bad idea, but when they're a few months out of the hospital, possibly still sick, then it's easy to panic when getting repeated calls from debt collectors and pull out their credit cards.

Same thing happens with auto repairs and house repairs. And many such incidental expenses. As a software developer making over $100,000/year, the instinct of many people here on HN is to say, "why the hell don't they save more?". But when you're making $30,000/year and raising a couple of kids, it's really not possible to save money in most cities and their suburbs. Sure, they could save up more money with that income in a cheap rural area or small town, but then there's no jobs.

Saving up enough money for medical and other emergencies is much harder to do for the average lower- to lower-middle class American that many people on HN might realize.

yborg• 8 years ago

(8) ... how people use credit cards.

This is the "HN bubble" at work. Many of these people are paying medical bills for which they have no insurance or trying to feed their children. And once they fall into the trap, the credit system is designed to keep them there. So yes, it is very tragic.

fierro• 8 years ago

Can someone give a concise ELI5 summary of this? I lack some of the context tomfukly understand this article

wfbarks2• 8 years ago

Household debt is not at record highs... Auto Loans and Student Loans are getting more problematic, but no reason to go all chicken little.

Tend to agree generally that we are approaching the apex of the cycle, and that share buybacks may be creating a sort of short term thermal.

vivafrance2• 8 years ago

Household debt is not at record highs

Ummm, yes it is: https://www.cnbc.com/2018/02/13/total-us-household-debt-soar...

wfbarks2• 8 years ago

Meh... You have your facts and I have mine... https://fred.stlouisfed.org/series/TDSP and https://fred.stlouisfed.org/series/HDTGPDUSQ163N

aurelien• 8 years ago

Sound like this website make so much pornshit on your privacy that GRPD does not let you access to it. It should be a fucking communist stuff that spy american pure people.

test6554• 8 years ago

When you know you are near the edge of another economic cycle, why not focus in short-term decisions? Large capital expenditures just before a recession doesn’t really make much sense. Better to board up the windows than expand in this context.

Beware the ‘Buyback Economy’

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