Wednesday, April 20, 2016

New Deal Democrat — The new parsimony

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.
 "Hysteresis." Also hysteria. Explains the public's paranoia over the deficit and debt?

Angry Bear
The new parsimony
New Deal Democrat

Note: This was previously attributed to Dan Crawford erroneously. Sorry for the error. tjh


Ryan Harris said...

Companies are selling off assets, shuttering plants and outsourcing operations, while at the same time issuing bonds to buy back equity. In a demand deficient environment, where competition reduces prices and boomer-hippies are screaming for more interest payments, it seems like a fairly rational choice for a board of directors.

Millenial and Gen Y folks don't seem to have any interest in taking on debt to transfer wealth their parents need for retirement. They aren't in any hurry to jump into housing that their parents have levered up to high prices with low rates either. Seems to me, the entire banking system and Wall Street Marketplaces are unnecessarily complicated contraption when Social Security could be expanded instead at a much lower cost to society.

Ignacio said...

"and boomer-hippies are screaming for more interest payments"

Made my day heh...

According to Matt we should just increase rates, which is the most inefficient and wasteful way to solve the problem. Again picking winners and losers.

The problem is that there is an interconnectedness between the different financial problems and thesolutions provided by the current arrangement/system due to the lack of compartemantalization and true specialization in the financial system. Seeking to solve the 'savings/savers problems' through the financial system using IR as a tool was bound to be a disaster as soon as population growth stopped and/or any sort of crisis happen.

IDK in USA, but in Europe most of the problems would be solved by politicians doing what they have been doing for ages, increase pensions, until they engaged on deficit hysteria and 'running out of money' behaviour. Sure private pension plans are going to suffer from a low growth environment, but honestly, if you expect to have increasing returns in an environment where real prices are going down (housing/energy), you are insane.

Enjoy your increasing purchasing power and stop complaining... Maybe sell some of those assets you have acquired over life, you won't need them when you are dead? Savers think they are entitled to constant growth of their private plans portfolio, for some odd reason.

Economists who think this behaviour is going to change suddenly when younger generations grow up are clueless, this is not some sort of collective psychologic spell at play, is just demographics and different social trends. Japan has been on this for decades and has survived just fine.

Matt Franko said...

"According to Matt we should just increase rates"

Not "we"... "they"...