Investment vs consumption loans

[timelets]

On the merits of Ross' advice to furloughed federal workers: If you are in a difficult financial situation, have no assets and somebody advises you to take a consumption loan instead of seeking alternative sources of income, dump the advisor.

Comments

Negligible risk

[malobukov]

Shutdown lasted for one month. A government worker who applied for a new credit card on day one, put all his purchases during this period on this new card, then paid it back within the typical 21 day grace period from the date of the first statement, would have lost exactly zero.

Re: Negligible risk

[timelets]

Sure. Having perfect information about the future helps make financial decisions.

For example, you know that you are going to retire and die at some point. How old are you going to be when you die and how much do you save for your retirement?

Re: Negligible risk

[malobukov]

That's why I said "negligible risk" rather than "zero risk".

US sovereign default risk is quite low. Surely investing in treasury bills is quite safe, so betting on government shutdown ending should not be much riskier.

Re: Negligible risk

[timelets]

Getting alternative sources of income, including food from charities, is even less riskier and has no downside whatsoever.

Re: Negligible risk

[timelets]

... even less risky. I'm becoming dumber as we continue this strange dialog.

But before you do

[malobukov]

Let's do the numbers. After all we're talking financial advice, so numbers are kinda important. What is your expert estimate of

1. PD (probability of default, in this case government shutdown continuing uninterrupted for, say, 3 months), and

2. LGD (loss given default, amount of money a hypothetical government worker loses in this case). Monthly minimum due payment on a typical credit card is interest plus 1/48th of principal balance.

Doesn't have to be precise, just order of magnitude. You can pick another horizon instead of 3 months if you like.

I'll then very scientifically multiply those two numbers to get expected loss.

Re: But before you do

[timelets]

I don't mean to be rude, but you just don't understand what I'm talking about. Your model is fundamentally wrong because it doesn't account for the person (and her situation) who would follow your hypothetical financial advice. It makes no sense to me to continue the conversation.

I get it

[malobukov]

No offence taken. Without context I just wasn't sure if your original post was based on your expertise in quantitative finance, retail credit, or risk management and therefore should be taken literally. Now I know.

Re: I get it

[timelets]

Good. Thanks for your understanding.