# Tag Info

14

The low interest rate will be in a different currency. If your domestic currency falls in value, the value of the mortgage in terms of the domestic currency goes up. Entities borrowing in a foreign currency and then running into difficulties is a standard features of financial crises over history.

14

What does stop me from taking a loan from a bank in a rich EU-country to build or buy a house in a poor country like Russia, while having EU-level interest rates below 3% instead of the Russian 15%? Other answers have already mentioned the currency risk you would have. Further limitation is that most European banks won't give you a loan at 3% interest for ...

12

As Dave Harris' points out in his comment, I assume that your question deals with events that do not compromise the individual's ability to work, which would prevent her from taking on debt. Let's take the example of a fire which happens with probability $\pi \in [0,1]$. The damage of a fire equals $D$ dollars, i.e. it costs $D$ dollars to repair the house. ...

11

I think the best way to answer your question is with a simple example showing why insurance is so prevalent in the economy. Hopefully, it should then be clear that it can still make sense to purchase insurance even if you can take out a loan to "cover the recent loss/accident". Suppose that there is a 1% chance of a £10,000 loss occurring. For a concrete ...

8

If there is inflation, what is your alternative? If you do not lend, your money loses even more of its value. A numerical example: If inflation is 5% and you can lend at 2% nominal interest rate, you can make the loan and lose 3% of your money's purchasing power OR you can not make the loan and lose 5% of your money's purchasing power. Poor choices, but ...

5

I agree with @BrianRomanchuk's +1 answer but I would like to expand on it to give you some more intuition why that holds. According to a simple monetary model of exchange rates, the exchange rate between two currencies (here Euro and Russian Ruble) is given by: $$S = (m - m^*) -\psi( y - y^* ) + \lambda (i - i^*)$$ where $m$ is the log of money supply, $y$...

5

Because of a change in regulation about how different accounts are to be recorded. That change was stated in the Financial Accounting Statements No. 166. If you look into Notes on Data relating the "Assets and Liabilities of Commercial Banks in the United States - H.8", you find the following statement from April 9, 2010: As of the week ending March 31, ...

4

The Credit-to-GDP, say ratio measures the relative size of the outstanding debt of non-financial private sector, say $D_{p,t}$ with respect to (yearly) Gross Domestic Product, say $Y_t$ $$\text{Credit-to-GDP ratio} =\frac { D_{p,t}}{Y_t}$$ Note that GDP should be measured in nominal terms here, since so is debt. It is a metric related to how much burden ...

4

Yes, there's daily data available on the St. Louis Fed's FRED.

4

Insurance: pooled risk. Loan: borrowing against future income. With insurance, you may face higher premiums if you make a claim. But you won't pay anything against the claim itself. With a loan, you are responsible for paying the claim. You pay some of it with past income (savings) and some with future income (borrowing). But in the end you pay ...

4

Not covered by the other answers: You have an accident in your car and it ploughs into a bus-stop severely injuring and permanently incapacitating several people. Not having insurance, you are presented with a demand for £10,000,000(*) to cover ongoing medical costs. How long do you think it would take to pay off this loan? (*) Figure plucked from air, but ...

4

The plan did involve loans but was mostly in the form of grants (gifts). As the Wikipedia entry states: The Marshall Plan [...] consisted of aid both in the form of grants and in the form of loans. Out of the total, 1.2 billion USD were loan-aid. Since the total economic support the program involved was of \$13 billion in contemporaneous time (roughly \$...

4

The same reason that oversupply leads to falling prices in any other market. There is a huge amount of money out there, and a lack of good returns with adequate levels of safety, so money is cheap. The reason this leads to negative rates is that money, like other goods, has a carrying cost. Keeping physical cash requires heavily secured real estate and is a ...

3

The question is belied by some basic misconceptions. Just to list a few: The comparison of GDP in nominal terms and implied statements about growth. The definition/measurement of GDP (where saving is apparently not part of GDP). The (completely) arbitrary prices of goods being prescribed for this economy. The meaning of equilibrium. John produces 100kg ...

3

Chile joined the OECD in 2010 but does not have an official export credit agency listed by the OECD in its involved in the Export Credit Group The Inter-American Development Bank is lending US$27 million to the Chilean Finance Ministry to support export promotion and services, but this does not look like financing So I would assume that financing comes ... 2 I think insurance and loan cover very different problems. Insurance covers potential losses for a fee. You take insurance to mitigate risk. By accepting a relatively small loss, you do not need to plan or worry about big failures or losses. On the other hand, loans do not protect you from any losses. Loans provide cash when you do not have enough right now.... 2 Brythan comes close with his answer. The reason that you don't take out a loan is because the lender would have to take the risk on your future income. When the reason you are taking the loan is for health reasons, the risk of not having enough future income to repay the loan is high. Most people can't get a loan for a car even when the car is used for ... 2 Imagine an economy with only one good, tomatoes, and three people, Lender, Borrower, and Owner. Owner owns all tomatoes. Lender owns all the money. And Borrower owns nothing. If Lender doesn't lend any money to Borrower and Lender doesn't purchase any tomatoes, the price of tomatoes is 0 as there is no demand. When Lender loans Borrower some money and ... 2 The lender is typically supplying loanable funds in the form of ‘savings’. I.e. money she wouldn’t spend until a future date. But the market for loanable funds allows one to earn interest on these savings rather than laying dormant (think about when people would store money under their mattresses). So, with this surplus of funds, another can make use of ... 2 Keep in mind that nominal interest rate=Profit/Initial Amount. The exact relationship that links real interest rate, nominal interest rate and inflation is$(1+R_{nominal})=(1+R_{real})(1+\pi)$where$\pi$is the inflation rate (Known as Fisher's identity)$R_{nominal}=R_{real}+\pi\$ is an approximation that works best when those variables are relatively ...

2

You dont even have to have money or other people to make transactions with to save. In economics savings is a proportion of your output/income that is not consumed. For example, you can have a Robinson Crusoe on an island all alone and he can save. An example, Crusoe will collect 10 pieces of wood uses 5 for fire and other 5 are left for later. That is by ...

2

At the national (macro) level in a closed economy, total savings must equal total investment. Total savings are total output - total consumption. If there is no "savings technology" with a depreciation rate below 100% in your economy then there can be no savings. I.e. there has to be a way to store things without losing 100% of what you store. Can John ...

2

The question is not restricted to mortgages. You're really asking about generic interest-rate arbitrage---borrow from the country with lower interest rate and lend (in your case, buy a house or become a mortgage lender) in the country with higher interest rate and earn the spread. This would lead to risk-free profit if there is no exchange rate risk---...

2

In the long run, consumers cannot spend more than they earn. In the short run they can spend more, increasing consumer debt, or they can spend less, decreasing consumer debt. There is a limit to how much consumers are allowed to borrow. The limit is determined by consumer income and the interest rate. If consumer debt increases faster than consumer income ...

1

It is true that paying back loans causes contraction of money supply (if not offset by faster creation of new loans). However, it is not correct to say that this generally happen when debt is forgiven and it does not need to lead to deflation. First, debt forgiveness can actually be thought of as a permanent expansion of money supply not contraction. An ...

1

It may help to forget money for a moment and focus on real goods. What saving ultimately means is that by working harder now, people can gain more leisure in the future. If the only goods are perishable foodstuffs, then indeed net long-term saving is impossible. People will have to do just as much work in the future to feed themselves, regardless of how much ...

1

Per fractional reserve system, banks lend deposited money as credit to clients provided they keep a reserve requirement. This is a misleading statement. A bank loan creates a deposit, which can be transferred to other forms of deposits. Does this apply to both transaction accounts and deposit accounts? As the above explained, this is not applicable. ...

1

I'm not sure what the "fuss" is. Is TRPF really so heavily disputed? In a sense, profits are just a kind of arbitrage, and so the reasoning behind TRPF is similar to the reasoning around zero-arbitrage assumptions (profit-maxing agents under perfect competition with free entry/exit and full information will drive supply up and prices down until the profit ...

1

Loans that have not been repaid are generally called "non-performing loans" or NPL. Each country's bank regulatory body should have statistics on this. Here's one from the World Bank. Note that this is the ratio between outstanding NPL and total outstanding loans. The ratio could go down if the borrower agrees to continue paying back, or if the banks decide ...

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