Monday, November 30, 2009

Why it is hard to imagine consumption reigniting.

Mark Thoma wonders about whether consumption will come back any time soon.

A graph making the rounds uses the Federal Flow of Funds data to look at the ratio of Household Debt to GDP--the ratio rose from around 60 percent as recently as 15 years ago to more than 100 percent now. If households begin reducing their leverage back toward the long-term average, it will depress consumption for three reasons:

Debt service payments will rise when interest rates rise, and so discretionary income will be lower than it was when households had less leverage ( we are getting some relief right now because of very low interest rates on debt tied to LIBOR or the prime rate).

Households will not take on new borrowing to support spending.

Households will in fact be amortizing their current debt (meaning they won't spend).

The counter-argument is that average household net worth relative to GDP remains quite normal by historical standards. But here is where the skewed distribution of wealth is a problem. I am reasonably sure that when the next Survey of Consumer Finances is released for 2010, median household net worth will be down. Corelogic says that one in four households with mortgages has negative home equity--this would be about 18 percent of owner households (about 30 percent of owners have no mortgage). If we combine this with the fact that 1/3 of the country rents, this means that the median households has little or no home equity. The median household is not loaded with financial assets, either. According to the 2007 Survey of Consumer Finances, only half of families have a retirement account, and only 21 percent owned stocks. Put this all together, the median household is not in great shape financially, and the median household consumes a higher share of its income than higher income households.

One more back of the envelope calculation on getting us back to a steady state: suppose the steady state household debt to GDP ratio is 70 percent. If the national economy uses 5 percent of its income to pay down that debt (which is about 7.5 percent of current consumption), at an interest rate of 8 percent, it would take 9.2 years to de-lever down to the steady state ratio.

[Update: the above back of the envelope assumes six percent nominal growth. If nominal growth is less, it will take longer].


Dorothy said...

Dear Site Owner,

I would like to say that your blog is well-written and it contains lots of useful and up-to-date information. We really got interested in your web resource and we would like to cooperate with you. My websites are devoted on various financial themes and the have got amazing traffic and Google Values.

My sites contains loads of useful financial information presented in news and articles that highlight the most much-talked-of issues such as credit cards, debt solutions, financial crisis, ways out of it, and many more. We believe this information can awake interest in your readers and can help you gain more and more traffics well. We would like to do some link exchange with your sites. If you agree then please let me know as per your convenience:

We thank in you in advance for your cooperation.

Best regards,

Dorothy Parker

Mitch said...

Very well presented. I'll check this out some of your sites here. I wish you well in everything and hopefully this endeavor of yours will bring big profits to you and to all that would follow you. Thanks and good luck again.

Anonymous said...

China et al save too much. The domestic central bank is attempting to force US consumers to consume more to make up the difference. This policy will create a long run disaster for the American people.

Anonymous said...

christian louboutin
high heels
womens boots
women's shoes
knee boots
women's boots
black shoes
boots shoes
new shoes
high boots
black boots
christian shoes
manolo blahnik
giuseppe zanotti
miu miu
christian louboutin pumps
christian shoes spring 2010
salvatore ferragamo
jimmy choo
choo shoes
christian louboutin shoes
christian lou16:13 2009-12-18boutin pumps
manolo sale
blanhnik shoes
miu miu shoes
knee high boots
thigh high boots
knee high
pumps shoes
red shoes
brown shoes
leather shoes
louboutin size shoes
black leather shoes
leather shoes boots
designer shoes
women's sandals

Anonymous said...

Good post and this post helped me alot in my college assignement. Thank you seeking your information.

Anonymous said...

crazy idea i know but how do u think credit cruch affected porn?

Anonymous said...

does anyone think porn is the only business still thriving during the credit cruch? I think many folks seek refuge in buying and wanking porn during the crunch

Anonymous said...

topic24, [url=]klonopin without prescription[/url], :-) lvb, order klonopin no prescription ;-(, [url=]order xanax 2mg[/url], :-( gwl, xanax 2mg *sorry*, [url=]order adipex online[/url], :-( ohx, order adipex ;-(, [url=]cheap alprazolam[/url], :-) zxm, alprazolam no prescription ;-(, [url=]buy ambien no prescription[/url], :-( hod, order ambien no prescription ;-(

Anonymous said...

Any idea how credit crunch affected porn?


martin said...

very well managed. i am really happy to find it.well as i think(or mostly economist says)the recession leave a very deep impact on the economy of every country. specially Real Estate sector.
i don't think that our GDP will be able to reach at the growth which was actually before the recession.
By: fractional property

Anonymous said...

PDF Créateur
TIFF en PDF Convertisseur
Texte en PDF Convertisseur
PowerPoint en PDF Convertisseur
image en PDF convertisseur
Excel en PDF Convertisseur
CHM en PDF Convertisseur
Word en PDF Convertisseur
djvu to pdf
pdf to png