Wednesday, December 23, 2009

Household financial burdens continue to ease

Every time I post an update of this chart I seem to get a number of incredulous responses. What the chart shows is that households' financial burdens are, on average, lower today than at any time in the past five years. Moreover, they are not any worse today than they were in 2001, and financial burdens have not risen materially for the past three decades. What most people believe, however, is very different: there seems to be a consensus out there that households are over-stretched and over-burdened by debt. Many people have indeed succumbed to mortgage and credit card debt, but the great majority, as suggested by this chart, have managed to stay afloat and have even reduced their debt burden over the past two years. It's very hard—if not impossible—to get from this chart to a conclusion that there is anything seriously wrong with households' finances.

I think this is very supportive of an optimistic outlook for growth going forward. 


Игры рынка said...

Just a thought

Interest payments on public debt are lower today as share of GDP than they were at any moment in the last several years. Would you claim that financial burden of public debt is easier today than 2 years ago?

I can not find a link out of my head but I am sure you can find it if you want

Scott Grannis said...

I don't think I would make that claim. I would instead note that the government has been intentionally shortening the maturity of its debt, thus exposing itself to rising interest rates, whereas the household sector has been doing just the opposite. The bulk of household debt is fixed rate (i.e., fixed rate mortgages), thus the housing sector is much less exposed to rising interest rates than the government is.

I would also note that while the average interest rate on Treasury bills and bonds is at or near an all-time low, the yield curve is at an all-time high in terms of steepness. The steepness of the yield curve is a forecast of sharply rising short-term interest rates in coming years.

Bret said...

Easing financial burdens in good news in the longer term, but the slope of the graph basically indicates that people aren't spending as much now which isn't really particularly good news for the shorter term except...

...the government and overall balance sheet isn't showing such good news. Indeed, if you consider government debt to ultimately be an obligation of households, how much is the burden really easing?

Scott Grannis said...

Bret: In the supply-siders' view, spending is not what drives the economy. Saving more is not bad for growth, since it provides the wherewithal for businesses and risk-takers to invest, and it is investment that ultimately is the best driver of growth.

Government finances are indeed in miserable shape, and that depresses everything. But deficits can be fixed in ways that don't drag down households. I think it's too early to assume that tax burdens are going to rise significantly.

Bret said...

Scott wrote: "But deficits can be fixed in ways that don't drag down households."

"Can" is the important word here. Anything "can" happen, but given the incentives those that govern us have, I find it very unlikely. Hopefully, you're right and your optimism isn't just a fantasy.

Scott wrote: "I think it's too early to assume that tax burdens are going to rise significantly."

At a minimum, the Bush tax cuts expire next year. You don't consider that a significant increase in the tax burden?

By the way, I fully understand the supply side perspective and more or less subscribe to it. It assumes reasonably robust future demand, and though that assumption has pretty much always been met in the past, it's not necessarily guaranteed, especially as needs are met with less and less of GDP leaving only desires, which are much more fickle.

Phil said...


I wonder what this graph would show if you left out the households with no access to credit on the bottom and those in the highest 5% of income on the top side? I think this would be a more meaningful analysis of how we are progressing as a nation.


Scott Grannis said...

Phil: I don't think the data is available to answer your question.