- the growth in household net worth as a percentage of income is slowing
- the growth in debt to personal disposable income and household debt to GDP is slowing
- household debt to net worth rises for a second quarter in row after having fallen in mid-2010
The picture is different with respect to the corporate sector, as the total debt to equity of private non-financial corporations continues to fall to record lows.
On a final point, I've been hearing commentators say that the household sector's position isn't so bad given that the household debt service ratio is still at a reasonable level. That, in my view, is a very simplistic way of looking at things. For instance, the chart below (double click to enlarge) shows that Canada's moderate debt service ratio is essentially being sustained by the low interest rates.* If you look at indicators such as total liabilities or the ratio of debt to net worth, you see that the situation isn't as acceptable as some make it out to be.
To be sure, higher levels of household debt may sustain higher levels of household assets. Also, the fact that debt is greater than income isn't a problem unless household income isn't sufficient to cover for debt payments and living expenses. However, the situation could turn ugly if the value of household assets falls, as this would undermine the basis on which the debt was issued. Therefore, in a context in which some economists are predicting a significant decline in home prices (up to 30 percent in some areas) within the next few years, it would be wise for Canada's monetary and fiscal authorities to tread carefully during this period when households are seeking to reduce their level of debt. Rising interest rates or a decline in household income could trigger financial problems moving forward.
* The chart is based on Statistics Canada data and my own calculations. Data in chart is for persons and unincorporated businesses.
'To be sure, higher levels of household debt may sustain higher levels of household assets.' I appreciate you qualify the above but it's this rule of thumb that is hurting the American consumer and in turn the US economy. The value of Debt is non-variable; asset valuations fluctuate like leaves in the wind!
ReplyDeleteWell said, Goffredo! I agree with you completely.
ReplyDeleteFirst of all, I agree with Goffredo.
ReplyDeleteMost of all, I already thought your blog great; now you integrate the Lecce people in your Barking Chorus; it is now stratospheric. They're all good.I am always surprised by your content!!!
You are certainly a circuitist. Unfortunately, I have not read from that school any pragmatic policy recommendation to resolve the existing economic predicament we (world) is experiencing with the exception of: forget the deficit reduction; it doesn't matter.
ReplyDeleteSince you propose the approach, do you have any suggestions.
Thanks Jorge! I'll do my best to keep this site's content relevant and interesting. As for the links I provide, I view these sites as good resources for anyone interested in knowing more about the stuff I write. In time, I plan to add other material that may be of interest to readers.
ReplyDeleteManfredo, you bring up an interesting point regarding the deficit issue. I think the reason why there's been so little discussion on other policy remedies has to do with the fact that, right now, the imminent threat is collective austerity. Therefore, it's natural that deficit hysteria be challenged. But also, I think it's crucial that people understand that balanced budgets are meaningless unless you have a balanced economy in which the different sectors' financial positions are at appropriate levels to sustain economic growth and full employment. Today, budget deficits are quite simply the most appropriate way to allow for a re-balancing household balance sheets.
Other policy remedies i find interesting involve supporting income redistribution. Much of this could be done through incomes policies and, from a long-term perspective, through monetary and fiscal policies. The "employer of last resort", the idea that the government provide a job guarantee, is another good idea. In my view, the most effective policy proposals for the current context are those that also aim to strengthen regulation of the financial sector so as to reduce risk taking. Here, I suppose I'm venturing into more orthodox thinking. I can see the benefits of imposing on banks more stringent lending standards and capital adequacy requirements.
In my posts, I've tried to raise awareness of the problem associated with strict inflation targeting. I think the general focus on inflation consists of a huge impediment to more sensible policy remedies. BTW, Dean Baker published a good article in the Guardian recently on the problem of inflation targeting: http://www.guardian.co.uk/commentisfree/cifamerica/2011/jun/20/imf-economists-greece-crisis
I also think that the idea of an oil buffer stock, which I've tried to cover, is a must for mitigating against the annoying supply effects caused by temporary spikes in oil prices.
Although these policy proposals are by no means the sole products of the circuit school, my view is that their purpose is certainly in line with the basic tenets of that approach, which is to have a broad perspective of the interconnectedness of monetary transactions and the impact of transactions on different groups and sectors.