Kelly Evans (The Wall Street Journal May 28, 2010) reports on a sick trend in private consumption in the United States. Despite high levels of household indebtedness, consumer spending grew at an annualized rate of 3.5 per cent during the first quarter of 2010. The savings rate showed little improvement, averaging approximately 3.1 per cent of household income.
Against this background, a peculiar paradox is emerging. While household consumption continues to rise and the savings rate remains abysmally low, the ratio of household debt to disposable income shrank from 132 per cent on average in 2007 to 122 per cent on average in December 2009. Over the same time period, the share of income required to make payments on debt and other obligations such as car leases fell on average from 19 per cent to 17.5 per cent.
This paradox is resolved in terms of debt default. The ongoing process of house foreclosures and credit card delinquencies is the mechanism whereby households are shredding debt and bringing spending into line with income. Kevin Lansing, a senior economist with the Federal Reserve Bank of San Francisco (where else) welcomed the news, claiming that it is a crude form of saving, and that it is the kind of purge needed for the economy to recover. Some of us would beg to differ and would be looking for the savings rate to increase towards double digits and for consumption outlays, especially on luxury items, to decline significantly in the short term as profligant households learn to take responsibility for their own actions. and to live within their means.
Today is an appropriate day to focus on debt, national as well as household. For the U.S. Treasury will announce today, that America’s gross federal debt has reached a staggering $13 trillion. This debt now approximates 83 per cent of the U.S. economy and will increase to 107 per cent by 2020 if the Obama budget is adopted, according to an analysis prepared by the minority staff of the Joint Economic Committee.
The report also directs attention to the division of responsibility between Democrats and Republicans for this massive level of accumulated federal indebtedness. Focusing attention on the party in control of Congress, since the legislative branch ultimately controls the purse strings, the report challenges a common view that the Republicans are primarily responsible. They determine that over the period 1946 to May 2010, 18 per cent of the debt was generated when the two parties shared control, that 56 per cent of the debt occurred while the Democrats controlled Congress and that 26 per cent of the debt occurred while the Republicans controlled Congress. Only 2.1 per cent of the total debt is attributable to the pre-1946 history of the Republic.
There is no sign on the political horizon that Congress or President plan to turn budget deficits into budget surpluses. So guess, Dear Readers, how the debt problem is going to be resolved. Private households are showing Washington the way. Expect debt defaults both through inflation and outright refusal to meet interest payments on Treasury notes. And expect the Federal Reserve Board of San Francisco to applaud this noble resolution, even as our Chinese bankers march down Pennsylvania Avenue to seize control of the U.S. economy.
Tags: debt default anticipated, household consumption increases, national debt at $13 trillion, private debt reduced by foreclosures andc delinquencies, savings rate reemains low
May 28, 2010 at 6:24 pm |
I think you are making an aggregation error.
Suppose the saving rate is 0% in aggregate, but some households save and others dissave. Household debt builds. Of course, household assets increase as well. Note that the alarming figures for household debt are net debt. They are total debt. And household net worth remained positive.
Anyway, in reverse, there is no saving. Those households that are in debt save to pay down debt. Those households that held that debt as assets receive payment and consume. Some households are saving and paying down debt. Other households are dissaving and selling off assets to consume more than they earn.
Of course, in reality saving rates have mostly been low, not zero. But again, those are aggregate.
I don’t deny that default is part of the story too. Just that the puzzle you cite is no puzzle. It is what should be expected.
On other thing. If households hold really low yielding assets, they may have to sell part of them off to maintain consumption. That is, the must dissave to maintain consumption. I think this is happening to many retirees.
May 28, 2010 at 6:25 pm |
oops
the alarming figures to household debt are not net debt. They are gross debt.