View Full Version : "Credit-push" inflation...? Ever studied?



SoonerDave
03-22-2014, 12:57 PM
I'm no economics expert, but I've always kinda held onto the theory that ever-expanding credit leads to a different kind of "inflation."

Pretend there's no credit around. Theoretical car sells for $10,000; with no credit, a cash-only sales is implied. Seller factors production cost, overhead, and profit to determine price.

Now, add the credit variable back in. Same car with credit persuades individuals to purchase by monthly payment rather than by sticker price. Seller can now increase that sales price and "amortize" the extra cost over the life of a loan, presumably at an interest rate that will outstrip the expected future value of that price.

We know the latter happens now - vendors push longer and longer-term financing, meaning the actual sales prices can be "devalued" or "watered down" - thus increased - because the delta is distributed over more payments - hence the presence of credit allows sellers to sell things (cars are just an easy example) at a higher price.

Same thing could arguably be demonstrated to exist in education market - wide availability of student "loans" (and current staggering debt load to evidence it) seems to parallel the manifest increase in education costs over a similar period.

I just wonder if any actual economists have studied anything like this, and drawn any conclusions about whether its real, or just something I perceive? I think of it as a one-off of what is called "wage-push" inflation - if there's a large increase in discretionary income, prices for some goods go up merely to chase the additional available money.

Food for thought.

bradh
03-22-2014, 01:29 PM
On the surface it makes sense

stick47
03-22-2014, 04:10 PM
Nothing new. I realized that about a generation ago. I also realized that the dumb people being protected and or bailed out by govt policies are loading the backs of the ones that pay their own way. A free society will only remain free when people are held responsible for their actions.

blangtang
03-23-2014, 12:16 AM
I'm no economics expert, but I've always kinda held onto the theory that ever-expanding credit leads to a different kind of "inflation."

Pretend there's no credit around. Theoretical car sells for $10,000; with no credit, a cash-only sales is implied. Seller factors production cost, overhead, and profit to determine price.

Now, add the credit variable back in. Same car with credit persuades individuals to purchase by monthly payment rather than by sticker price. Seller can now increase that sales price and "amortize" the extra cost over the life of a loan, presumably at an interest rate that will outstrip the expected future value of that price.

We know the latter happens now - vendors push longer and longer-term financing, meaning the actual sales prices can be "devalued" or "watered down" - thus increased - because the delta is distributed over more payments - hence the presence of credit allows sellers to sell things (cars are just an easy example) at a higher price.

Same thing could arguably be demonstrated to exist in education market - wide availability of student "loans" (and current staggering debt load to evidence it) seems to parallel the manifest increase in education costs over a similar period.

I just wonder if any actual economists have studied anything like this, and drawn any conclusions about whether its real, or just something I perceive? I think of it as a one-off of what is called "wage-push" inflation - if there's a large increase in discretionary income, prices for some goods go up merely to chase the additional available money.

Food for thought.

here's something:



Can Cheap Credit Explain the Housing Boom? (http://www.nber.org/papers/w16230)

Servicetech571
03-23-2014, 05:45 AM
Government run colleges are mostly for with Government loans and Government taxes. Government requires the Government degree to get a Government job. Once you are working at your Government job, you get to pay taxes so the next round of students (most who went to Governemnt schools) can go to the Government college. How about getting Government out of education? If Government got out of education all the "crap degrees" (no job at graduation) would simply go away.

SoonerDave
03-23-2014, 09:17 AM
here's something:



Can Cheap Credit Explain the Housing Boom? (http://www.nber.org/papers/w16230)

Interesting. I didn't read the whole thing, but it does suggest that the cheap credit was at least partly responsible for housing price increases, so I'm not totally nuts. It's one of many factors.

ylouder
03-23-2014, 10:36 AM
Sooner i think you are dead on.

You already covered the student loan explosion that will someday implode, along with the housing and car prices.

I'm only in my early 30's and i remember when 50 grand was the price for a fully decked out luxury bmw, mcb, lexus with all the bells and whistles. Today the average price of a pickup truck with almost no options is 42k. People arent earning more than 10 years ago but they do now offer 60, 72,and even 84 month financing which is insane. Heck I can remember my dad buying a brand new 4x4 truck (cloth seats, tape deck) for 18 grand, today that same model is 46k.

Thats crazy.

bradh
03-23-2014, 12:21 PM
it's terrible with cars, they just keep pushing out the length of the loans. fully loaded 2015 Escalade is around $92k, finance over 6 years gets you a whopping $2k payment...WTF?

gjl
03-23-2014, 12:46 PM
it's terrible with cars, they just keep pushing out the length of the loans. fully loaded 2015 Escalade is around $92k, finance over 6 years gets you a whopping $2k payment...WTF?

For a depreciating asset.

Jersey Boss
03-23-2014, 02:22 PM
I'm no economics expert, but I've always kinda held onto the theory that ever-expanding credit leads to a different kind of "inflation."

Pretend there's no credit around. Theoretical car sells for $10,000; with no credit, a cash-only sales is implied. Seller factors production cost, overhead, and profit to determine price.

Now, add the credit variable back in. Same car with credit persuades individuals to purchase by monthly payment rather than by sticker price. Seller can now increase that sales price and "amortize" the extra cost over the life of a loan, presumably at an interest rate that will outstrip the expected future value of that price.

We know the latter happens now - vendors push longer and longer-term financing, meaning the actual sales prices can be "devalued" or "watered down" - thus increased - because the delta is distributed over more payments - hence the presence of credit allows sellers to sell things (cars are just an easy example) at a higher price.

Same thing could arguably be demonstrated to exist in education market - wide availability of student "loans" (and current staggering debt load to evidence it) seems to parallel the manifest increase in education costs over a similar period.

I just wonder if any actual economists have studied anything like this, and drawn any conclusions about whether its real, or just something I perceive? I think of it as a one-off of what is called "wage-push" inflation - if there's a large increase in discretionary income, prices for some goods go up merely to chase the additional available money.

Food for thought.

A couple of points.

You neglect to factor in the sellers cost to not only put the car on the lot but to keep it on the lot prior to it being sold.

Also it seems you assume that the seller is the either the only or best lender for the credit. How does it profit the dealer to increase the sale price if his competitor does not? We all know that it is now possible to get the best price from internet services or to negotiate your best offer by knowing what the manufacturer charges the dealer. You don't have to use their financing.Get the price before discussing your financing.

As for the trend of car prices going up as well as the length of loans, the average "shelf life" of a new car is greater than what it was 10-15 years ago as well.

SoonerDave
03-24-2014, 04:21 PM
A couple of points.

You neglect to factor in the sellers cost to not only put the car on the lot but to keep it on the lot prior to it being sold.

Also it seems you assume that the seller is the either the only or best lender for the credit. How does it profit the dealer to increase the sale price if his competitor does not? We all know that it is now possible to get the best price from internet services or to negotiate your best offer by knowing what the manufacturer charges the dealer. You don't have to use their financing.Get the price before discussing your financing.

As for the trend of car prices going up as well as the length of loans, the average "shelf life" of a new car is greater than what it was 10-15 years ago as well.

Think perhaps you're missing my point just a bit - I'm talking less about the individual dealer than I am the price set by the manufacturer. And I"m also talking less about any specific transaction than I am the overall business of vendor financing. Generally, automotive manufacturers realize there is money to be made by financing cars - once to the dealership, again to the consumer. And if they finance more money for a longer time, that increases that revenue stream.

Regardless of what percentage of people take private or third-party financing, there's little question that manufacturer financing to the end consumer is a huge revenue stream for that manufacturer. The price the dealer sets to the dealership (which is a bit of a fiction, because manufacturers and dealerships don't deal in one-car-at-a-time sales in the first place) is still the pivot point at which all the other pricing discussions orbit, and that crosses all dealerships.

Obviously you don't have to use vendor financing. That's not the point. The point is that enough customers do such that it is a profitable business for the vendors who provide that financing, and hence it serves as one important (but obviously not exclusive) variable in the equation of how that manufacturer sets his prices. If lots of credit is readily available, and the profit is a function of how much is financed, it militates in favor of keeping prices higher. How that factors into the myriad other variables is certainly up for discussion.

Servicetech571
03-24-2014, 06:38 PM
For decades now the credit division of Sears has been the most profitable part of the company.

kelroy55
03-25-2014, 10:13 AM
it's terrible with cars, they just keep pushing out the length of the loans. fully loaded 2015 Escalade is around $92k, finance over 6 years gets you a whopping $2k payment...WTF?

Why I drive a 07 Jeep :)

Chadanth
03-25-2014, 12:01 PM
For decades now the credit division of Sears has been the most profitable part of the company.

And the riskiest. Even Target is spinning their off.

ctchandler
03-25-2014, 12:04 PM
And it's why I drive a 06 Grand Marquis. I have never financed a car longer than four years. Of course, the last new car we bought was a 2001 minivan and my car payment was over $500. I bought my Mercury used a little over two years ago. It was a prize, owned by a retired couple and kept in their garage. He had quit driving due to age. It had 28,000 miles so I just quit looking at new cars and bought it. If I buy another car in my life I'm afraid I will be looking at a five or six year loan.
C. T.
Why I drive a 07 Jeep :)