Broad Oak: your emotional support animal

Tuesday, November 23, 2010

Inequality, housing costs and resetting the economy

Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

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8 comments:

The Arthurian said...

Hi, Sackerson.
I cannot read the year numbers... What are the start and end points of the 25 years of stability? I'm guessing, the same as the post-war "golden age" (1947-73) or right in that neighborhood.

The Federal Reserve removed from the economy a lot of "bad assets" - mortgage backed securities and such. However, as people are still expected to make the payments on those mortgages (or to default on them, as you say) the bad liabilities remain in the economy.

Remove the bad liabilities, and the economy will recover. The Fed already owns the stuff that must be forgiven. If our goal is to have economic recovery, I don't see a problem.

Art

Sackerson said...

I've fixed the pic. 1952 - 2009.

Having the government take over the debt merely shifts the burden, as you say. I suppose that the debt would then be repaid through higher taxes (driving business away) or reduced public services (= extra unemployment and more social security payouts, plus depressing effect on demand). There's no point passing the grenade around the room, you have to throw it out of the window.

The Arthurian said...

Oh I like the grenade thing! and, thanks for fixing the pic.

Sax, I'm only a hobbyist fascinated by the complexity of the economic system. I probably say a lot of stupid things without even knowing it. And if I make my statements forceful, it is only to make the ideas clear. That said, I hope there is some sense in this --

The government already took over the debt, or a good chunk of it. The burden shifted, but no, the risk shifted from lenders to the lender of last resort -- the Federal Reserve. I guess the debt created by this takeover of debt would be repaid... No, I don't know if it EVER would be repaid. Ordinarily, government debt is NOT repaid, but only rolled over. (As far as I know, anyhow.)

But anyway, now that the Fed owns all that bad mortgage debt, it costs nobody anything if they just forgive it all. Remember, the RISK has been taken out of the private sector, but the BURDEN has not. Forgiveness relieves the burden and paves the way for renewed growth.

Or do you mean that if the bad mortgage debt is forgiven, this creates a greater obligation to be repaid by higher taxes or lower services...
But I don't see it that way. The central objective is to restore growth. If the economy grows adequately, no one need worry about higher taxes or lower services. And as for that bad debt, the fact that the Fed took up that risk does not reduce the risk. It only reduces it for the private sector. There is just as much chance now as ever, that the bad mortgages will default. The way to get the grenade out the window is to reduce the accumulation of debt.

Sackerson said...

No need to be so modest, Arthiuran: if the people running the show knew what they were doing, would we be in this mess?

Yes. it seems to me that taking over the debt shifts us from the fast, high pain of widespread defaults over to the long, miserable grind of a heavy extra, communally-shared burden.

The problem - and this is why we're in a dilemma - is that if you then default or forgive, someone eats the cost. If banking shares go to zero, investors lose - and how many pension funds have banking shares? If the government even partially defaults on its bonds, the bondholders (including some increasingly powerful foreign nations) are cheated and presumably get mad. If the government finally takes charge of its own currency and simply prints trillions, that dilutes the value of cash and bonds and no-one will want to deposit money or help the government roll-over its debt. Interest rates then soar, or credit dries up.

I'd like to see a way in which debt could be purged without huge dislocation to the system - and without war, invasion and important people hanging upside down from lamp-posts.

Probably the way forward is what governments are starting to do, which is alter social benefits, particularly pensions. If 60 is the new 40, then maybe retirement at 70+ is the new retirement at 65.

The Arthurian said...

Sackerson,

The problem - and this is why we're in a dilemma - is that if you then default or forgive, someone eats the cost.

Yeah... If, instead of printing $2T and using it to buy up bad debt, they had used it to pay it off, that bad debt would have become good, and it would have gone away. I know, the Fed didn't do that. (QE2 provides another opportunity.) But it still seems to me, they already printed all that money, the damage is done, there must be some way to make the debt go away. (I guess there's not much economics in these thoughts.)

I am focusing specifically on the dark blue cloud of debt shown in the first graph here. If that debt goes away, who eats the cost? If the economy improves, no one will care about that cost. (I guess there's not much economics in these thoughts.)

Probably the way forward is what governments are starting to do, which is alter social benefits...

Perhaps. But it's just so wrong. Has technology gone backwards? No! There is no reason we should have to make do with less. The problem is not in the "real" economy, but in finance. The problem is in the money. It seems to me, if we let paper problems determine our fate, that the "real" economy cannot help but follow us downward. I understand now the creation of Dark Ages.

I'd like to see a way in which debt could be purged without huge dislocation to the system...

I had a bad day the other day, trying to work out my "print money and use it to pay off private debt" idea in the context of "balance sheets." I don't know much about balance sheets, but I think they demand things that protect the existence of even absurd levels of debt created by bad economic policy.

...and without war, invasion and important people hanging upside down from lamp-posts.
//
That's the kind of writing that keeps me coming back, Sack.

Sackerson said...

Print money = inflation = steal from those who have deposited cash or bought bonds.

In a perfect world, we'd take back all the money that was stolen from us. Fine the brokers, bankers etc; but vendors would also have to refund purchasers the money used to purchase houses over the last, what, 25 years? Then unbuy all the stuff that equity release made it possible to acquire, etc.

I agree, it ain't right what they done ter us, but it's like trying to undo WWII. The real issue is making the baby boomers take responsibility for some of the debt they're (we're) trying to offload onto the next generation. We had a heck of a party and the bill is coming in. And some will have gotten away with it - ridden the inflation train and cashed out in 2007/8. Certainly many of the fiancial/political class have gotten away with it.

And attempts at revenge or rough justice will much more likely hit the innocent or the fringe offenders - think of the three poor Greek bank tellers who burned to death in the Athens riot this year.

I'm as reluctant as you are to let them get off scot-free. This opens another issue, which is the withering of democracy. Americans need to reclaim their Republic (you may think it's a cheek a Brit saying this, but I did encourage my bro to take US citizenship so I am invested, in a way).

Glad you like the style, anyhow.

The Arthurian said...

Print money = inflation = steal from those who have deposited cash or bought bonds.

Debt-deflation = failure of growth = vandalize the future.
or, similarly...
Gold standard = arbitrary restriction of growth = prevent the generation of future real wealth = vandalize the future.

In a perfect world, economic policy would control the balance between the quantity of money and the quantity of credit-in-use, and we would not have the sort of problems we have today.

The real issue is making the baby boomers take responsibility for some of the debt they're (we're) trying to offload onto the next generation.

I don't buy it. Looking at the growth of debt since the 1970s, what I see is not a natural phenomenon. It is not the result of "a heck of a party." It can only be the result of an economic policy dedicated to restricting the quantity of money (yeah, I know, I'm the only one who sees it that way) while encouraging spending and credit-use. It is the result, in other words, of a conflict between anti-inflation and pro-growth policy.

I also enjoy being able to say things like this, to someone who makes me think harder.

Sackerson said...

There is the point, made to me years ago, which I'd never considered until then: if money is lent out at interest, how is the interest going to be paid?

All the original borrowed money has to go back. So where does the money for the interest come from? This means that the money supply has to keep expanding, to create enough to service interest.

Either that, or the moneylenders will take the interest from non-loaned money and eventually have in their hands all the money in the world.