Thursday, July 14, 2011

Graphs speak louder than words

L. Randall Wray at EconoMonitor, Household Borrowing and Debt
Image
Randy's conclusion: "Combine that with tighter fiscal policy and another Great Depression cannot be ruled out."

18 comments:

Craig Austin said...

wow - prettying telling. a bunch of folk don't have any money.

TomatoBasil said...

Why do economists compare income with debt instead of total debt with total domestic private non-financial money? This is like comparing your car speed with the amount of fuel in your gas tank -- it is only relevant at the extremes -- comparing your rate of speed to rate of fuel consumption is interesting. Or growth in debt to income, as both are rates changing net worth. My thinking is that a person that has 20,000 on credit card with a $1,000 in their current account isn't charging more at walmart regardless of income. A person that has $20,000 on a credit card with $500,000 in their money market account can keep spending regardless of income fluctuations.

Mario said...

yikes!

Randy put it very aptly by stating another leg down "cannot be ruled out." Very well put indeed.

I'd love to hear what libertarians would say about this...surely somehow they see this as inflationary. LOL ;)

Why do economists compare income with debt instead of total debt with total domestic private non-financial money?

probably b/c most Americans don't have much of a savings to begin with and if they did it's savings and therefore not to be used for consumption (and if social security goes we'll all have to start saving to the tune of 20-30% or more just like 3rd world households do!!!). Plus also note that this chart is not comparing income to debt. It's comparing debt to the rate of borrowing in the household sector.

Craig Austin said...

@TomatoBasil

What at interesting analogy. Need more time to think it through but maybe you could flush out how that analogy applies to the debt of a currency user vs. the debt of a currency issuer. Debt of user is a burden because it reduces their ability to spend or save. Debt of issuer is a convenience in that it provides the user a safe place to store his money without forcing users to spend (ie. invest) in the marketplace.

analogies that can enable folks to conceptualize the user vs. issuer paradigm are very helpful

Crake said...

What makes up debt in that chart? Is it 100% consumer debt? Or does it include mortgages and car loans? If it is 100% consumer debt, it is a likely precursor to flat consumer demand. If the debt is mostly mortgages and car loans the debt level seems fairly reasonable to me and not prone to consumer slow downs, especially once the housing market stabilizes and the collateral begins to appreciate.

Options Trading Investor said...

There is another series of charts regarding the changes in gold price and the swiss franc relative to other safe-haven currencies I find relevant.

Tom Hickey said...

" especially once the housing market stabilizes and the collateral begins to appreciate."

When would that be?

Tom Hickey said...

"There is another series of charts regarding the changes in gold price and the swiss franc relative to other safe-haven currencies I find relevant."

Right, other than the USD, gold and CHF are the safe havens. The problem is that the safe haven of the USD is tsys, and there are a pile of those. If the debt crisis provoke an exodus from tsys, where are all those USD going to go into a highly liquid safe haven. Gold and CHF are already moving in anticipation.

Broll The American said...

@CraigAustin @TomatoBasil
To keep things straight in my own head, I use the analogy of burning calories as opposed to food consumption. Eating food would be government liabilities / user savings while exercising/burning calories would be taxes/paying down debt. Its a good think to keep one in context of the other, but they are not irreparably connected. One can eat a donut without exercising from time to time, especially if you're starving... or growing. If you're ill and lethargic, the last thing you want to do is to stop eating and go on a 10K run.

Crake said...

I did not know exactly where to put this but I found this story on a site, that is not MMT oriented, but share general themes.
From a MMT perspective, what do you think of this? It seems a parallel could be made between spending and taxing from this story. And what I like about the story is it is cute and gets the point across well to any audience:

How to Fix a Financial Crisis

A Slow Day In Texas

It's a slow day in a little East Texas town. The sun
is beating down, and the streets are deserted. Times
are tough, everybody is in debt, and everybody lives on
credit. On this particular day a rich tourist from
back east - is driving through town.

He stops at the motel and lays a $100 bill on the desk -
saying he wants to inspect the rooms upstairs in order to
pick one to spend the night.

As soon as the man walks upstairs, the owner grabs the bill and
runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to
retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill at the
supplier of feed and fuel.

The guy at the Farmer's Co-op takes the $100 and runs to
pay his debt to the local prostitute, who has also been
facing hard times and has had to offer her "services" on
credit.

The hooker rushes to the hotel and pays off her room bill
with the hotel owner.

The hotel proprietor then places the $100 back on the
counter so the rich traveler will not suspect anything.

At that moment, the traveler comes down the stairs, picks
up the $100 bill, states that the rooms are not
satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything.

However, the whole town is now out of debt and now looks to the
future with a lot more optimism.
And that, ladies and gentlemen, is how the United States
Government is conducting business today.

http://zfacts.com/p/1155.html

Broll The American said...

@Crake... each participant in the town's economy had a asset in the the debt that was owed to them. So the balance sheet of each town member is identical to when they started.

I'm interested in reading thoughts on how this relates to the final statement of "how the United States Government is conducting business today." Could the $100 be stimulus, used by the population to reduce their personal debt. Can that same $100 be taxed out of the economy after it has done its job?

Seems to me like all current federal stimulus has gone straight to hooker to help her and the hotel owner, but that still leaves the butcher and the farmers holding the bag. They would actually poorer in comparison to the hooker and hotel owner.

Craig Austin said...

It's an interesting story but not very insightful. Banks will only lend you money if you have documented income. So where is there income that enabled them to get the loans. If the story is suppose to helpful then we should probably need to know the finances of all the individuals and the bank to make judgement on the "ponzi" scheme implication of their story

Craig Austin said...

@Tomatoe: "income to debt is like car speed to gas"

well a car needs gas for speed but a consumer doesn't need to go into debt to buy gas

@broil: eating (input) is user savings while exercising (output) would be taxes:

essentially what your saying eating (savings) is potential energy and exercising (spending) is kinetic energy. Savings (potential) that goes to pay debt, which is an asset transfer, is destroyed from the perspective of the borrower.

@mario "Why do economists compare income with debt instead of total debt with total domestic private non-financial money?"

george friedman address that is his book actually

Crake said...

No, that story is not perfect, and has holes. I thought it could be tweaked - seems like a horizontal money parallel too.

What I like about the story is it is simple and it gets people to think that about the idea that one’s liability is another person’s asset. It is like planting a seed. The seed is simply to question what debt really is (it is another person’s asset.) From there maybe hit them with the idea that the government’s debt is our savings. So I think a tweak to the story to make in by in paradigm, as you say, would be a good way to get the message out.

Most people will not read analyses and entertain things that take thought and mental effort, but they will read cute short stories.

Calgacus said...

Good story. It explains the non-neutrality of money. Without the stranger, there would have been debt-deflation, bankruptcies discounting everyone's debt to each other and job losses. That is where we are.

In reality there is also the banker, the most indebted of all, but who also holds the most debts owed him. Uncle Sam's minions come along, the banker bribes them and Uncle Sam bails him out. So the banker is left holding everyone else on a leash - including, in effect, Uncle Sam.

Ralph Musgrave said...

No one has answered the question by Crake: “what makes up debt in that chart?”. I’d go further: the two lines are supposed to represent “borrowing” and “debt”. Those two are the same on some definitions. So the chart is meaningless till someone gives some definitions.

Also the chart is much more interesting on the EconoMonitor site because the two lines diverge dramatically around 2006, whereas the chart ends around 2006 as shown here on Mike Norman’s site.

Tom Hickey said...

"Also the chart is much more interesting on the EconoMonitor site because the two lines diverge dramatically around 2006, whereas the chart ends around 2006 as shown here on Mike Norman’s site."

Ralph, it is the same chart. Apparently, it is so large here that the end is running off your window.

Mario said...

I'm not for certain but my assumed understanding is that the "debt" line represents the amount of current debt American households have (car loans, school loans, mortgages, credit cards, etc.). The "borrowed" line is the amount of bank loans being made. That is to say how many people are STILL borrowing or STILL going into debt. Essentially it shows that demand is very weak and that the deleveraging process has really only just begun and will likely get worse depending on the current fiscal policies in play today.

As I say, I don't "know" this for certain, but that is what I gathered from it intuitively and at a glance.