When you lend money from a bank, you will not spend it on fancy restaurant visits. Because you know you will have to pay it back.
When you own a house and there is a cafe in that house which pays rent even though it is closed, because it gets the money from some governmental covid assistance program, then you do not have to pay the money back and can spend it consumer goods and drive prices up.
"When you lend money from a bank, you will not spend it on fancy restaurant visits. Because you know you will have to pay it back."
This doesn't reflect consumer behavior. Just consider a simple example ignoring future income. Say I have 520k. I buy a 500k house.
Scenario 1. I buy it with cash and I have 20k left.
Scenario 2. I buy it with a mortgage (20% down), and how have 420k left.
It's easy to see why those in scenario 2 would continue to fund lifestyle choices like eating out.
The reality that they need to pay back that debt gets moved to the future. The future also provides additional income. So the need to pay it back gets delayed, meaning money available now is freed up for lifestyle choices.
I think it is hard to get much insight from these "just so" stories because so much is dependent on the circumstances and counterfactual.
I think is reasonable to think that low interest rates pulls consumer spending from the future into the present, when compared to higher interest on lending.
High inflation also spurs consumer spending because the return on savings is less.
back to housing, My experience is that personal spending is waaay down after buying a house, because I now need to service 1.2M of debt every year, which is about 80k.
Agree with your first 3 points. I would also say though that your experience with housing is not unexpected, but this does not contradict the point I'm trying to make. The comparison would be the situation where you bought that house with cash. If you could even do so, I think it's safe to assume your spend would be even less.
The point is, that creation of debt does not immediately net cancel out to a no-op in terms of consideration for monetary inflation.
This is all in response to the comment several steps up "Banks lending is an increase in the money supply" and the commenter who presumably disagreed with that by saying that one will not spend that money in the economy because they have to pay it back.
Even though you are right, this is a very poor example.
If the person that lent you the 400k don't have them at their disposal then the total amount of money at the disposal of someone in the economy didn't change after your transaction.
Fair distinction. But even in the hard money lending case, the implication is that money is being freed up to circulate. More velocity leads to more inflation
> When you lend money from a bank, you will not spend it on fancy restaurant visits.
Given the amount of people with insurmountable credit card debt and nothing to show for it except Instagram pictures, I'd say you're not entirely correct.
If the money borrowed is not spent on investments, then they would have to use after-tax money to pay the interest.
This after-tax money needs to have been pre-tax money at some point, so therefore, they do pay taxes at some point. Just not income tax presumably, but something akin to capital gains tax (e.g., sell off some of their assets/equity to pay interest). It's a lower tax rate, but in absolute terms, it's still a large numbner.
When you own a house and there is a cafe in that house which pays rent even though it is closed, because it gets the money from some governmental covid assistance program, then you do not have to pay the money back and can spend it consumer goods and drive prices up.