The new parsimony
– by New Deal democrat
The new parsimony
I came across the below graph showing that relationship of average household net worth with average debt vs. the personal savings rate from the NY Fed last week (h/t The Conversable Economist):
The important point was that the relationship has changed since the Great Recession. Even though there has been a big increase in average household net worth thanks in particular to the rebound in house prices, the personal savings rate remains elevated compared with its prior history.
This is evidence of something President Obama said during a recent interview, namely, that “Some people are still recovering from the trauma of what happened in 2007-2008,”
That traumatic fundamental change in behavior, a new parsimony, is also apparent in the ratios of household debt to disposable personal income:
The Great Recession caused households to deleverage away a 30 year rise in obligations in just 5 years, and there is no sign of debt levels increasing even now.
A similarly dramatic reversal appears when we measure household (and business) debt against GDP:
Household, business, and non-financial debt all rose as a share of GDP for at least 50 years (!) before abruptly reversing course during the Great Recession — and as of the last measure, both household debt and non-financial debt were still declining.
For those of you not old enough to remember, in the 1960s and 70s, as both inflation and interest rates almost relentlessly increased, the mantra was to take out debt now, at lower interest rates, and pay it back with cheaper dollars, i.e., pay back today’s debt with tomorrow’s inflated dollars. In the 1980s and 90s, ever more debt could be financed at the same monthly payments, as interest rates on the payments decreased.
Despite even lower interest rates since 2008, however, households have actually been reducing debt. This is a new behavior, and I believe it is fair to say that it has been induced by trauma. Further, just as the generation scarred by the market crash of 1929 and the Great Depression remained savers for the rest of their lives, I expect the generation that has learned this behavior to remain parsimonious for a long time to come. If anything, debt levels compared with GDP will probably continue to decrease until the post-Millennial generation that does not remember the Great Recession becomes the dominant cohort several decades from now.
cross posted with Bonddad blog
this also explains why lower gasolinee prices aren’t resulting in the boost to spending elsewhere everyone thought they would…
Trauma? Sounds about right. Another element would be a loss of faith– in banks, social supports, even the rule of (financial) law. An economy can bounce back from trauma, even if only “one funeral at a time,” but a rational loss of faith such as we have seen over the last forty years can easily become the entrenched and inherited to become the received wisdom of the population at large. “Hide your money, don’t pay taxes, don’t invest because most investors are some relative of Mr. Ponzi, and even if you can afford it, don’t generously support the people around you because they will never get ahead far enough to repay you, no matter how honourable they may be.”
This reminds me of the pre-wandering beggar village in the folk tale Stone Soup. The moral of the story is generally said to be “Generous participation makes everyone better off,” but tale tellers never go into what led the villagers to their miserly ways. Under the beggar’s spell, one villager brings out an onion, another a potato, a third contributes a cabbage… but what is left in their larders the next day, once the soup is all eaten and the beggar gone? Sometimes, generous participation only wipes out already scanty resources.
At that point, one needs to ask why the resources are scanty, not why the people are miserly.
I think the other factor in the deleveraging is simply lack of income.
The system has simply rung out as much income from the masses as is possible. No more multiples of $50/month of one’s pay check are left.
One thing I notice in my grown children is the absence of debt. Virtually no credit cards, yet the all have very good job, the eldest is now in the $250k bracket. They will buy houses, but all of them are first looking for income properties. They don’t bank on future raises in income from new jobs or salary.
Yet they were not scared by the 2008/9 recession (all four) did excellent studies and have monthly offers of new job…
It is maybe a generational thing, they are concerned about waste and ressources first and their well being second.
Private debt is people spending more than their incomes. There is a limit to that. At some point, incomes won’t support the debt load. But also, this is related to two other sectors government and the current account. As the fiscal position moved toward surplus for the economy to expand you need the private sector to take on debt and or current account surpluses. Wynne Godley’s Sectoral balances seem to be related directly to your post.
Trauma by accounting identity?
This is suprising? Look at the behavior of the depression generation, and how it took them leaving the scene for borrowing to become the way to go. After a financial trauma the very old ideas of neither a borrower or lender be come back. It will mean a slower economy as folks won’t buy until they have the money in hand to buy what they want. The 2008 events may have enabled folks to delay their gratification more than in the past. Consider that folk who remember the 1930 depression were likley born in the 1920s so were 80 or so before the 2000 events. The boomers had only second hand stories of what happened then. It seems a historical rule that it takes at least one and sometimes more than one generation for effects of events to fade from popular recall and their effect on behavior.
Our previous generation had good jobs, defined as jobs that were secure, provided good health insurance, and promised a decent pension upon retirement. Today’s generation has to provide for the times when their precarious employment stops and they have to continue for a while without income, be able to meet the high deductibles and co-pays of what is now called “affordable” insurance, and save for a retirement without pension. Higher savings rate: reaction to trauma or to current financial realities?
Anecdotally, I have higher savings for 2 reasons. One is trauma – I spent over 6 months looking for a job and I have no confidence that it can’t happen again.
But, two: I just became an empty nester. My daughter is done with college, I have downsized my house, I can take advantage to the over 50 catch-up contributions. Absent the melt-down, would you be wondering whether the demographics of the Boomer generation retirement has a significant impact on the aggregate?
“Consumers Spend More, Debt Climbs”
September 9, 2015 • Karen DeMasters
“Americans have been spending more in the last few months and, while they’re at it, they’re racking up more credit card debt, according to two reports issued Wednesday.
Americans are on track to add $60 billion to their credit card debt by the end of the year, according to CardHub, a financial website concentrating on credit card debt. If that proves true, Americans will have a total of more than $900 billion in credit card debt by the end of the year, just shy of the amount CardHub says is unsustainable.
At the same time, savings rates remained static for the second quarter of the year and consumer spending was up, says Dan Geller, a behavioral finance scientist who produces the Money Anxiety Index.
“Credit card debt statistics, in particular, reflect consumer sentiment and can foretell overleveraging bubbles that may trigger constriction in credit markets,” says CardHub.”
CardHub estimated that credit card debt levels will increase by another $60 billion by the end of 2015 and take the total U.S. credit card debt, close to $900 billion, the level where unsustainability sets in and delinquencies start zooming.
Even more telling, I think, is the recent story in the Atlantic:
“Since 2013, the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?”
While saving money is undoubtedly a wise and virtuous thing to do, you’ve got to have it to save in the first place – and a huge percentage of people around the world don’t. We have in place a global economic system that does not serve the interests of those people; in fact, given the dire warnings from the IMF about the possibilities of another global financial crisis, that system is a direct threat to the interests of those people. Parsimony is not the answer.