Constantin Gurdgiev — Money Velocity and Signals of Households Leverage Risks

Equally patent is the fact that the traditional indicators of forward inflationary pressure (e.g. money velocity) are not quite in agreement with the measured inflation (which has exceeded the Fed target four months in a row now and has been beating analysts' expectations over the last three months). The only way the two figures can be reconciled is via increased debt levels on household balances sustaining consumption growth.…

true economics
Money Velocity and Signals of Households Leverage Risks
Constantin Gurdgiev | chairman of the Ireland-Russia Business Association, contributor and former editor of Business & Finance Magazine, and lecturer in Finance with Trinity College, Dublin

Bill Mitchell — Common elements linking US and UK economic slowdowns

Last week, the British Office of National Statistics (ONS) released data that revealed that quarterly growth in real GDP dropped to 0.3 per cent in the March-quarter 2017, down from 0.7 per cent in the December-quarter 2016. Household consumption growth fell in an environment of rising household debt and flat real wages. In the same week (April 28, 2017), the US Bureau of Economic Analysis released the latest National Accounts data for the US for the March-quarter 2017 – Gross Domestic Product: First Quarter 2017 (Advance Estimate). It showed that GDP grew on an annualised rate of 0.7 per cent in the first quarter of 2017, down from 2.1 per cent in the December-quarter 2016. The US result was driven, in part, by a dramatic slowdown in personal consumption expenditure and a negative contribution from government. The common elements linking the slowdown on both sides of the Atlantic are clear – growing and massive levels of household debt, flat growth in personal incomes (real wages etc) and inadequate fiscal support for growth. These elements, in part, were key features leading up to the GFC. Governments haven’t learned that relying on personal consumption expenditure for economic growth in an environment of flat wages growth means that household debt will rise quickly and reach unsustainable levels. How harsh the correction is unclear. The faltering the outlook in the US and the UK suggests that their national governments will need to increase their discretionary fiscal deficits to stimulate confidence among business firms and get growth back on track.

Bill Mitchell – billy blog
Common elements linking US and UK economic slowdowns
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

J. W. Mason — Saving and Borrowing: A Response to Klein

Yes, we are still arguing over terms like "saving" and "borrowing." JW Mason clears some of it up.

J. W. Mason's Blog
Saving and Borrowing: A Response to Klein
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Yves Smith — Bank of International Settlements Paper Confirms That High Levels of Household Debt Hurt Growth

We’ve written from time to time that not all debt is created equal. Prudent business borrowing enables companies to make investments and expand operations. And even though governments like the US that issue their own currency may nevertheless sell bonds, operationally they can simply create more dough to fund spending. The constraint on spending is creating too much inflation, not bankruptcy. And since as we’ve regularly discussed, the business sector chronically underinvests, deficit spending is necessary and desirable most of the time. Economist Mariana Mazzucato has argued that there are certain risks, such as engaging in basic research, where the uncertainty is too great for entrepreneurs. And that’s before getting to the fact that the party that makes the discovery could easily see its technology exploited by free riders.

However, economic studies have regularly found that high levels of household debt is a negative for economic growth. Moreover, some economists have found a strong relationship between high levels of consumer debt and economic crises. Yet if you read the business press, analysts and government officials see rising consumer borrowing as a plus for growth. How does that make sense?

A recent Bank of International Settlements paper (hat tip UserFriendly) helps reconcile this apparent paradox. The immediate impact of household borrowing does indeed spur the economy near-term but creates drag down the road. And the level at which household borrowing becomes a net negative is 60% of GDP, when nearly all advanced economies are at higher levels. Worse, the dampening effect is more pronounced when the household debt to GDP level exceeds 80% The BIS puts the US as above that threshold….

Naked Capitalism
Bank of International Settlements Paper Confirms That High Levels of Household Debt Hurt Growth
Yves Smith

The Arthurian — Designing the Future

Choose the red line, not the black. Household debt to GDP.

The New Arthurian Economics
Designing the Future
The Arthurian

FRBNY — Mortgage Borrowing among Most Creditworthy Abates

Today’s release of the New York Fed’s Quarterly Report on Household Debt and Credit for the first quarter of 2015 reports a flattening in household debt balances. The slow growth in debt balances has left many wondering about the dynamics behind this change—who is borrowing, and who is paying down their balances? Thus, we use the same data set, the New York Fed Consumer Credit Panel (which is itself based on Equifax credit data) to identify the changes in balances by credit score, updating a post from last year with more recent data and also providing an in-depth look at the change in mortgage balances.

The charts below show contributions to changes in debt balances by borrowers’ credit scores (Equifax Riskscores), first looking at the data we presented in our earlier post (2012:Q4 to 2013:Q4) and then the most recent data, from 2014:Q1 to 2015:Q1. Since the figures are expressed as growth contributions, summing the numbers for a given loan type produces the overall percentage growth for that type over the relevant four-quarter period. The changes in contributions since 2013 are relatively modest, but there have been some important developments. The first notable difference is that credit card balances rose more democratically this time—with borrowers with credit scores over 620 all contributing to the increased balance. And there’s one difference that stands out even more, which is that the most creditworthy borrowers held back housing debt growth even more significantly during the most recent four-quarter period....

The rest of the report doesn't look good for a housing recovery.

FRBNY — Liberty Street Economics
Just Released: Mortgage Borrowing among Most Creditworthy Abates

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

See also

Driving home prices into the stratosphere has been top priority for the Fed. It’s called the “healing of the housing market.” The higher the home prices, the more they’re “healed.” 

It was designed to bail out the banks, their stockholders and bondholders, such as Warren Buffett who is the largest investor in the nation’s largest mortgage lender, Well Fargo, and presides over a vast finance and insurance empire. It was part and parcel of the Fed’s successful plan to inflate all asset prices via waves of QE and interest rate repression, come hell or high water.

Inflating the prices of stocks and bonds is one thing. People don’t have to live in them. Not so with homes. People have to live somewhere. By inflating home prices, the Fed has inflated the costs of everyday life for all Americans. No big deal for the wealthy. But woe to those on a median income....

The new American business model new normal.

People who pay a large part of their household income for rent or a mortgage, or who save assiduously for a huge down payment, don’t have much cash left to contribute to the overall economy. Most of their income simply gets confiscated by inflated home prices, or the resulting high rents and associated expenses. It’s channeled to landlords, PE firms, and REITs that own the homes; banks and investment funds that own the mortgages or the mortgage-backed securities; and a million other entities. Most of it becomes part of the grease that keeps Wall Street from squealing. But nothing happens with that money to move the real economy forward.

Wolf Street
How Soaring Housing Costs Impoverish a Whole Generation and Maul the Real Economy
Wolf Richter

Nick Bunker — An update on U.S. household debt

Debt to income ratio falling.

WCEG
An update on U.S. household debt
Nick Bunker, Policy Research Associate

Evan Soltas — The Madre of All Bubbles

Unemployment, social unrest, failed currency union, household debt, real estate bubble — Evan hits the high points.

This is probably just the beginning of my work on the Spanish housing bubble. It may be the topic of my senior-year thesis. (Yes, the recent posts on rents and the Internet were me brainstorming.) We'll see.

Evan Soltas — Economic & Thought
The Madre of All Bubbles

Bill McBride — NY Fed: Household Debt increased in Q4 2014

Delinquency declining.

Calculated Risk
NY Fed: Household Debt increased in Q4 2014
Bill McBride

Also

Liberty Street Economics
Just Released: Student Loan Delinquency Rate Defies Overall Downward Trend in Household Debt and Credit Report for Fourth Quarter 2014

Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

Josh Boak — Americans In Debt: 35 Percent Have Unpaid Bills Reported To Collection Agencies

Over a third of US adults are "deadbeats."

Huffington Post
Americans In Debt: 35 Percent Have Unpaid Bills Reported To Collection Agencies
Josh Boak | AP

Bill McBride — Larry Summers on "House of Debt"

Summers: "Atif Mian and Amir Sufi’s House of Debt, despite some tough competition, looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession. Its arguments deserve careful attention, and its publication provides an opportunity to reconsider policy choices made in 2009 and 2010 regarding mortgage debt."

Calculated Risk
Larry Summers on "House of Debt"
Bill McBride

Household debt down to levels not seen since the 1980s!

(h/t to Matt Franko on this)

It looks like household balance sheets are really starting to become quite healthy. Check out the chart of the Fed’s “Financial Obligations Ratio.” It’s a measure of the total amount of monthly debt service (mortgage, rent, car payments, insurance, credit cards, etc) for an average household, as a percentage of its income. The lower the ratio, the less of a burden monthly debt service is. As you can see, the burden is quite low. In fact, this chart shows and amazing improvement. Total debt service as a percentage of income is now down to the levels not seen since the 1980s. This means if we can get through all this fiscal cliff and debt ceiling bullshit, we really could have a big expansion in the economy and a stock market boom.

U.S. Consumer Debt Hits All-Time High: Borrowing Rises To $2.7 Trillion

The Federal Reserve said Friday that consumers increased their borrowing by $14.2 billion in October from September. Total borrowing rose to a record $2.75 trillion.

Borrowing in the category that covers autos and student loans increased by $10.8 billion. Borrowing on credit cards rose by $3.4 billion, only the second monthly increase in the past five months.

The Huffington Post
U.S. Consumer Debt Hits All-Time High: Borrowing Rises To $2.7 Trillion
Martin Crutsinger

Joe Weisenthal — Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way

A number of economists privately told Obama that his recovery policies were weak in one key area: They didn't do enough to address the mountain of homeowner debt.

Business Insider
Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way
Joe Weisenthal

John Carney — Three Cheers for Elizabeth Warren, Our First Blogger Senator

Hi all, I'm back from a great trip to Asheville to be with some old friends for a few days catching up. I was pretty occupied with that, so I missed a whole bunch, although I did read all the comments here.

I'll try to put up some of the most noteworthy things that I missed as I go through the feed. This is from John Carney last Thursday. John's expertise is in banking law, so this observation is especially significant. It also accords with what MMT economists have been saying. John is hardly a raging liberal or progressive, either, so his observation cannot be easily brushed off as merely partisan spin.

The last thing I put up here was John's post on apparent machinations to keep Elizabeth Warren off the Senate banking committee. Regardless of whether Warren makes it onto the committee, she is going to be a force in US politics and political economy for the foreseeable future. Coming from the liberal state of Massachusetts, her seat is safe and she is likely to be around for some time if she chooses to. This was probably the brightest spot in the entire election from the financial and economic point of view.

Given the degree of opposition to her nomination to head the Consumer Protection Agency and the funding of Scott Brown during her campaign to unseat him, I'm sure there's serious weeping and gnashing of teeth going on right now because her momentum could not be stopped. I'm also sure that plans being laid to blunt her effect as much as possible.

It occurs to me that if Elizabeth Warren were to understand the MMT approach to the issues over which she is most concerned, she would become the spearhead of the drive for a correct understanding of monetary economics in politics. Maybe the route to her ear lies through Bernie Sanders, who at least assembled an economic advisory committee that was composed of knowledgeable people, even though he doesn't seem to have drawn on that resource yet.

CNBC NetNet
Three Cheers for Elizabeth Warren, Our First Blogger Senator
John Carney | Senior Editor

JW Mason — The Dynamics of Household Debt

Changes in debt-income ratios can be attributed to primary borrowing, interest rates, growth, and inflation. In a new working paper, we apply such a decomposition to the evolution of U.S. household debt.  This shows that changes in borrowing behavior has played a smaller role in the growth of household leverage than is widely believed. Rather, most of the increase can be explained in terms of “Fisher dynamics” — the mechanical result of higher interest rates and lower inflation after 1980. Bringing leverage back down will similarly require contributions from factors other than reduced borrowing.

Read it at The Rorty Bomb
JW Mason: The Dynamics of Household Debt

by J. W. Mason
(h/t Mark Thoma)

We draw two main conclusions. First, as a historical matter, you cannot understand the changes in private sector leverage over the 20th century without explicitly accounting for debt dynamics. The tendency to treat changes in debt ratios as necessarily the result in changes in borrowing behavior obscures the most important factors in the evolution of leverage. Second, going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. Even the very large surpluses of 2006-2011 would not have brought down leverage at all in the absence of the upsurge in defaults; and in the absence of large federal deficits and an improving trade balance the outcome would have been even worse since reductions in household expenditure would have reduced aggregate income.  As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs.

Household Debt Service Ratio back to 1994 levels

Read it at Calculated Risk
Fed: Household Debt Service Ratio back to 1994 levels, Mortgage financial obligations remain elevated

A sign of progress amid an ocean of misery.