There I was, minding my own business, reading a lengthy comment at EconLog that presented a model of what has happened during the “Great Recession” when I was confronted by this statement:
For the consumer cohorts, assume a correlation between income level and savings. Stated simply assume low income consumers to be net borrowers and high income consumers to be net savers.
That didn’t really comport with my intutions so I did a little quick research on the subject. What I discovered doesn’t really settle the question raised above one way or the other but I found it interesting nonetheless.
32.4% of all household debt has been incurred by the top 10% of income earners. 50.6% of all household debt has been incurred by the top quintile of income earners. Nearly three-quarters of all household debt has been incurred by the top two quintiles of income earners which roughly translated into household making $65,000 per year or more.
IMO this stands to reason. Rich people buy expensive stuff and buy on time. Using other people’s money, i.e. borrowing, is a common way to get rich.
I’ve recounted this anecdote before but when I was a kid I heard one of the richest guys around, a neighbor who’d founded a big finance company that you’ve probably heard of, say “I never know where my next interest payment is coming from”.
However, one thing is clear. Any private debt problem we have is not due to low income earners borrowing too much but to high income earners not saving nearly enough.
Good thing we aren’t worried about that term “net”.
I don’t know whether the top 10% of income earners are net savers. The information is rather hard to come by. I’d guess they are and I’d further guess that their total savings are large since their total incomes are large.
I acknowledged as much in the body of the post.
I also don’t see that it matters much if the issue is total private indebtedness. The lowest income quintile accounts for roughly 3% of all indebtedness.
BTW, I thought the original comment that served as the jumping-off point for this post was prolix pseudo-mathematical horse-hockey. It was filled with bad assumptions and the author clearly didn’t understand the role of banking in the money supply.
I’d like to see a breakdown within each income cohort. Among the top 10%, I’d expect the segment of the cohort that holds significant consumer debt to mostly be very deeply in debt (people with a temperment to live beyond their means, but with high access to credit as a result of their high incomes), but debtors to be a smaller percentage of the cohort than lower-income households since a future-oriented temperment (i.e. a willingness to sacrifice today to improve your position years down the road) is likely to lead to both higher savings and less debt as well as higher earnings potential.
I’d also expect high income folk (in general) to be more savvy about money management and to take on debt strategically. Buying goods expected to appreciate in value on credit (e.g. mortgages), holding low-interest debt to term when there are higher-interest savings and investment opportunities available, taking advantage of grace periods and teaser rates on consumer debt then paying the balance in full before the normal interest rates kick in, etc.
I can’t tell since the original comment has been removed, however, was this mathematical horse hockey going on to make claims/conclusions about the total private indebtedness or something else. If the latter, then it might still be relevant. The part you quoted merely says that there is a correlation between savings and income where at a certain income households become net savers (borrowers) given that they are above (below) that income level, its a bit more subtle than just looking at total private indebtedness. Where the person goes with it after that, I don’t know so can’t comment more.
“Rich people buy expensive stuff and buy on time. Using other people’s money, i.e. borrowing, is a common way to get rich.”
This is a ridiculous statement. Corrected: Using other people’s money, ie borrowing, is a common way to accumulate assets (and appear to be rich). However, if one intends to honor the liabilities taken on, they are no richer, and perhaps poorer if financing costs exceed asset utility. I think this was Steve V’s point..
The OPM argument only pertains to investment assets where accretion in asset value, or asset utility, exceeds financing costs. See: a car loan, a home mortgage, or an LBO. If they are wasting assets……….anyone who does this is one dumb motherfu……if they intend to honor their financial liabilities, that is. Don’t dismiss that last part; its the lynchpin.
BTW – this “rich” guy has not had a credit card balance in 30 years, nor a mortgage balance in 10.
“However, one thing is clear. Any private debt problem we have is not due to low income earners borrowing too much but to high income earners not saving nearly enough.”
IMHO this is also a wrongheaded analysis. What’s the definition of a “private debt problem?” I’d say its debt default. And default is overwhelmingly in lower income earners.
You might say it some volume measure of debt. But if its being serviced………?
As an aside, and perhaps the point Dave is really trying to make, I see far too many high income earners saving too little, spending too much. But that’s a value judgment, and not one for us to decide for our neighbors – in a free society – unless we are asked to subsizide these folks when the shixt hits the fan and they ask for our help. This is the proverbial big house no furniture issue.
We happen to live far, far below our means, are very happy and content to do so. Simple roots, simple life. It will enable us to handle any economic shocks, to provide for our daughter, and to leave to what we deem are worthy charitable or extended family needs…………..unless the stupid feds get their hands on it, that is.
Some professionals use debt as a liability shield. I don’t know whether this is a good idea, but the only person for whom it made sense to borrow 101% on a house to me was a doctor.
” but the only person for whom it made sense to borrow 101% on a house to me was a doctor.”
If a doctor did it, it was probably a bad decision. I am often shocked when I find out what people are spending on houses. They just assume that their salaries will always go up.
I am with Drew. No credit card balance, little debt otherwise. Live well below means and leave son in a good position.
Steve