The Social Cost of Federal Financing 87 



the right along the steeper Hne means that he is borrowing to 

 increase his present consumption at the expense of future dimin- 

 ished consumption; the slope of this line reflects the relatively 

 high borrowing rate. Moving to the left on the less steep line 

 represents saving out of present income at the relatively low interest 

 rates that can be earned on savings accounts and other assets. It 

 can be seen from the diagram that point a', the point of tangency 

 between the saving line and an indifference curve, is the preferred 

 point that this individual can reach: it is on the highest attainable 

 indifference curve. Point b (Figure 13-b) illustrates the case 

 where the individual will borrow and thereby reach the preferred 

 point b', while point c (Figure 13-c) represents a situation where 

 the individual does not find it worthwhile to lend at low rates or 

 to borrow at high rates, and so simply spends his current income. 



There are several fundamental factors which determine the 

 general shape of a particular consumer's indifference map in any 

 one period. First, there is the phase of the consumer's life cycle 

 of earnings and of expenditure needs. A young married person — 

 with an expectation of a rising income, with dependent children, 

 and with large needs to fully equip his household with standard 

 durables — has a high preference for current consumption expendi- 

 tures. An older person, expecting a falling income and retirement, 

 saves to increase his consumption later on, and so on. Second, an 

 individual's attitude toward satisfaction enjoyed at different points 

 of time will be reflected in this preference map. People with a 

 very short horizon will have strong preferences for present con- 

 sumption, while misers will favor the reverse. Third, a person's 

 need and desire for providing for financial contingencies will help 

 to determine these preferences. Many other factors could be cited, 

 but this brief list at least indicates their general nature. 



Much of consumer borrowing is for the sake of purchasing 

 durables before sufficient cash can be set aside to pay for them; 

 all mortgages and most installment paper fall in this category. 

 Such borrowing, in a sense, is for investment rather than consump- 

 tion, for in each instance the asset yields a return to the owner. 

 The return may be monetary; a house, for example, reduces rent 

 payments. It may be a saving of labor, as in the case of washing 

 machines. The rest of the return may be in the form of satisfac- 

 tion enjoyed directly, sometimes as extra convenience, often as the 

 enjoyment of consumption through use of the durable. But what- 

 ever the form of the return, a rational consumer will borrow at a 



