Facing South: 12/22/04

[Charles Brown <cbrown@xxxxxxxxxxxxxxxxx>]

^^^^^

CB: What is " shifting consumption between periods at a discount rate in the
high 80's" mean , if I might ask ?

^^^^^^^^^

Sorry, terrible abuse of jargon.  The discount rate is the borrowing or
lending rate, so it's the rate of return at which you can move payments
around in time. So, if I want to buy a turkey now, but I don't get paid
until the 30th, then I have to "shift forward" my wage packet by getting a
payday loan.  The percentage of the wage packet that I give up for doing so
is the discount rate.  It makes sense to talk about shifting consumption
between time periods when the subject matter is the economics of the banking
system, but in few others.

The discount rate is "in the high 80s" because (thinking about it this way)
if I charge you $5 for a $200 payday loan for two weeks, then that is about
the minimum I can economically get away with as a payday lender; that $5 is
only barely going to cover the 20 minutes of my time it takes to fill out
the paperwork.  But that's a 2.5% interest rate on a two week loan, which is
equivalent to a 90% APR.  This is always worth bearing in mind when
campaigning about the loan shark industry; lots of the eye-popping interest
rates in this industry are created this way; rather than being huge fat
returns for the capital employed, they are the result of taking the fixed
cost element of a loan and compounding it continuously.  The lesson is that
the really sucky thing about being poor and needing the services of payday
lenders is that you keep borrowing small amounts for short periods, which is
a very inefficient way to borrow money.

best,

dd

^^^^^^^

dd,

Thanks !

The "High 80's " is rounded off to 90% in your discussion here ?

Charles