General Discussion

So, I'm finishing an Economics Degree, so while I am not yet a PHD or a leader in my field I have the basics down at the very least. I also have the ability to go through some pretty serious reference material.

It occurs to me that a lot of people simply don't understand how this or that works. Maybe it's retirement savings, maybe it's banking, maybe it's how taxes are withheld from paychecks. I either know the answer or can give an answer.

So, ask away and we can all learn a thing or two.

Why is capitalism so evil?

@CatBountry

What makes you think that capitalism is evil?

I mean, sure it's pretty far from perfect, but it was never meant to be prefect. It was intended to be a "least bad" option. There are a lot of critical weaknesses that need addressing, no economist pretends that externalities don't exist or that market and social equilibrium are precisely the same. But it works orders of magnitude better than trying to inject values or political policy into resource rationing, because that has very long history of being so much worse.

Besides, many of the things that people complain about aren't necessarily a function of capitalism, but are a function of humanity being human or political policies for political ends. I can't really give a better explanation without hearing your specific critique.

@Aesoporific

... ****, I didn't think this far ahead, I was just asking a sarcastic question.

@CatBountry

Don't worry, I understand. I would argue that the vast majority of "economics is evil" commentary come from a lack of understanding of the subject, or a reading that assumes that capitalism is somehow the value system of the wealthy as opposed to a social science.

Sarcastic questions are only bad if we are unwilling to examine why they are supposed insightful and cutting.

So I've been at my job about 4 years now and I bought a house 1 year ago. Financially, I've been putting most of my money into paying down the house (I had the second mortgage paid off in less than a year, for example) rather than putting a higher percentage of my salary into my retirement fund. My logic here is that if I get the house paid off before I retire, my biggest monthly expense won't be an issue anymore and therefore if my retirement fund is smaller than it should be, I'll still be okay.

Is this reasonable? I currently put the maximum matched percentage into my retirement fund (for me it's 6%). So I'm actually getting 12% of my salary put in retirement, even if I only contribute half that much.

Am I going to end up on the street eating cardboard when I'm old? ;)

The difference between deficit and debt is really quite simple. Deficit how far revenue falls short of expenses this period, usually a year. So, if you pull in $90 million in taxes but have $100 million in obligations, then you have a deficit of $10 million. Debt, on the other hand, is the total amount of money borrowed. So if you run a deficit rather than not pay out on obligations like Medicare or salary for troops you issue debt instruments, like bonds. So at the end of the period you issue some bonds and take that money to pay the troops and impoverished citizens and promise to repay the bondholders out of future revenue.

On Austerity and Debt Spending:

A government isn't a private entity in that it doesn't age and die. In theory when those bonds come due the government can simply issue new ones and rinse/repeat the process indefinitely. This isn't normally done, mostly because governments generally don't need to put it off indefinitely. Inflation is normally 2-4% a year, and as such cuts the value in goods of a currency in half every 25 years or so. As a result inflation makes it easier to repay those bonds as the government has to give up less in the future to repay the same number of dollars. Additionally, GDP (and therefore tax revenue) rises over time, this means that as long as the interest rate paid on the bond is less than the combined effects of economic growth and inflation then there is no downside to carrying the debt. This is how most governments manage debt, kicking the can down the road actually makes the debt cheaper so they do it until it is trivial to repay.

To answer an anticipated question about China and debt:

It's also important to note that these are bonds, and therefore cannot be "called in". The worst China could do is decide not to buy US Treasury Bonds. Given that US Treasury Bonds are generally considered to be "riskless" (or the only things that would prevent repayment are so horrible that the fact that the US defaulted would inconsequential by comparison) then it's unlikely China bowing out of the market would have a meaningful impact on the ability of the Treasury Department to find buyers. Additionally China has a rather small amount of debt, only 46% of US government debt is publically traded of which China owns 8% or $1.2 trillion. Japan owns approximately $1 trillion and US private citizens own $9.8 trillion.

@CapnMasquerade

If the rate you are paying on your mortgage is greater than the rate you are getting on your retirement fund then your actions are perfectly reasonable, especially given that you aren't leaving the free money on the table. If you want to maximize your retirement savings you should pay down the most expensive debt first, and then start saving.

If you want to have FUN while saving for retirement then pick up a hobby that you can monetize. I, for example, homebrew. Having something that you can do for fun that pays for itself or gives you a second income is a great idea if you are worried that your primary job won't yield enough money for retirement.

It is also important to note that while retirement accounts are good, you may want to take money that is currently sitting in bonds, a money market, or just in savings that you don't need to use soon or as an emergency fund and put it in a market index fund. The stock market invariably has higher returns than bonds over the period of a decade, so there's no reason to leave money in less volatile investment vehicles over the short run. Granted, you'll have to remove that money some years before you retire and move it to safer investments so that you aren't caught out by a depression or market panic, but that's a discussion for someone in their fifties.

I do have a coworker who's been talking to me about the stock market and how to use it to my advantage but man, the whole idea makes me incredibly nervous. Still, I know I'm not exactly rolling in cash off my savings interest, so maybe I should look into it a bit more. Thanks!