http://www.bloomberg.com/news/2011-07-08/household-debt-is-at-heart-of-weak-u-s-economy-business-class.html
Weakness in household balance sheets has hammered the economy. Atif Mian of the University of California, Berkeley, and I have shown that the recession began as early as the end of 2006 in areas of the country with elevated levels of household debt. Further, employment, auto sales, and residential patterns in these highly levered areas remained mired in a severe recessionary environment through the first quarter of 2011. California, Arizona, Nevada, and Florida account for 30 percent of the employment losses during the downturn, even though they accounted for only 20 percent of jobs before the recession.
The basic argument, laid out in a series of studies, is this: When highly indebted households experience a shock to their credit availability that necessitates deleveraging, their decline in consumption and efforts to pay back debt push interest rates down. In a well-functioning flexible-price economy, interest rates would decline to the point where households with healthy balance sheets would be induced to increase their consumption, thereby making up for the reduced purchases of the over-levered households.
But what happens if real interest rates need to fall dramatically -- even go negative -- to boost the economy? The existence of currency prevents the nominal interest rate from going below zero, which effectively limits real interest rates from getting low enough unless the economy experiences substantial inflation. So even though interest rates for financially healthy individuals are historically low, they need to get even lower to induce those consumers to buy a car or remodel their kitchen. In such an environment, the economy will be stuck in an equilibrium where household demand for goods and services is depressed by a real interest rate that isn't sufficiently low.
Weakness in household balance sheets has hammered the economy. Atif Mian of the University of California, Berkeley, and I have shown that the recession began as early as the end of 2006 in areas of the country with elevated levels of household debt. Further, employment, auto sales, and residential patterns in these highly levered areas remained mired in a severe recessionary environment through the first quarter of 2011. California, Arizona, Nevada, and Florida account for 30 percent of the employment losses during the downturn, even though they accounted for only 20 percent of jobs before the recession.
The basic argument, laid out in a series of studies, is this: When highly indebted households experience a shock to their credit availability that necessitates deleveraging, their decline in consumption and efforts to pay back debt push interest rates down. In a well-functioning flexible-price economy, interest rates would decline to the point where households with healthy balance sheets would be induced to increase their consumption, thereby making up for the reduced purchases of the over-levered households.
But what happens if real interest rates need to fall dramatically -- even go negative -- to boost the economy? The existence of currency prevents the nominal interest rate from going below zero, which effectively limits real interest rates from getting low enough unless the economy experiences substantial inflation. So even though interest rates for financially healthy individuals are historically low, they need to get even lower to induce those consumers to buy a car or remodel their kitchen. In such an environment, the economy will be stuck in an equilibrium where household demand for goods and services is depressed by a real interest rate that isn't sufficiently low.
No comments:
Post a Comment