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

Atif Mian and Amir Sufi — Why the Income Distribution Matters for Macroeconomics

Obvious to everyone but conventional economists. (See Manfred's comment on March 27, 2014 at 11:01)

House of Debt
Why the Income Distribution Matters for Macroeconomics
Atif Mian and Amir Sufi

Steve Roth comments:

STEVE ROTH ON MARCH 27, 2014 AT 12:10 PMI

Thanks for these great links to the empirical literature. Got my reading cut out for me.

On the theory: the arithmetic of this is inexorable — roughed out in a simple model here:

http://www.asymptosis.com/does-upward-redistribution-cause-secular-stagnation.html

As the post says, this is only one economic effect being illustrated. But the potential power of this effect seems massive — especially over decades — and it seems to be almost universally ignored and even pooh-poohed by economists, even liberal economists.

http://www.asymptosis.com/a-liberal-is-someone-who-doesnt-know-how-to-take-his-own-side-in-an-argument.html

http://www.asymptosis.com/underconsumption-income-wealth-and-capital-gains.html