Household Debt and Deleveraging

I wanted to draw your attention to an interesting post on household debt from Josh Mason over at Mike Konczal’s place. Here’s some snippets that caught my eye:

What we find is that the entire increase in household leverage after 1980 can be attributed to the non-borrowing components of the equation above — what we call Fisher dynamics. If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2.

and

Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking.

My takeaway from this is that, if the changes are not due to a change in borrowing behavior but rather due to changes in the “non-borrowing components”, deleveraging by changing borrowing behavior will be difficult if not impossible. Or, said another way, we won’t get where we need to go either by foreclosure or paying down debt.

3 comments… add one
  • Ben Wolf Link

    A lovely straw-man argument from the authors. Simply take half the private sector out of the equation and then say it wasn’t consuming greater quantities of debt over the last thirty years. Let’s completely ignore that debt accumulated by firms is every bit as important to the economy. Mr. Mason needs to come to grips with the reality of sectoral balances and stop drawing artificial boundaries.

    While household debt in 2008 might have been 100% of GDP, total private sector debt was 300%, and Mr. Mason’s acknowledgement that starting around 2000 households did go heavily into deficit suggests (as I and others have been arguing) that the tax hikes and surpluses of the Clinton Administration in the late 1990’s are what drove the private sector to heavily leverage itself as it was slowly starved for net financial assets.

  • Sam Link

    Or, said another way, we won’t get where we need to go either by foreclosure or paying down debt.

    Sounds like an argument for ngdp targeting (raising nominal incomes) to me!

  • Drew Link

    I must be missing something. People stuck in a paradigm of borrowing in relatively cheap dollars and then repaying in inflated dollars is news? The elephant in the room is the 30 year fixed rate mortgage.

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