Category Archives: household debt

2/10/20: A new mortgage arrears crisis on its way

 

My latest article on Irish banking sector problems with distressed mortgages is out today in The Currency

There’s a new mortgage arrears crisis on its way, and official Ireland is not ready for it

The Central Bank of Ireland has started publishing new data on mortgage arrears – and the news is not good. An arrears crisis is brewing. The banks, and the state, are woefully unprepared for it.

https://thecurrency.news/articles/24779/theres-a-new-mortgage-arrears-crisis-on-its-way-and-official-ireland-is-not-ready-for-it/ 



23/2/20: Fake Data or Faking Data? Inflation Statistics


As economists and analysts, almost all of us are trying - at one point or another - make sense of the, all too often vast, gap between the reality and the economic statistics. I know, as I am guilty of this myself (here's a recent example: https://trueeconomics.blogspot.com/2020/02/18220-irish-statistics-fake-news-and.html).

An interesting and insightful paper from Oren Cass of the Manhattan Institute dissects the extent of and the reasons for the official inflation statistic failing to capture the reality of the true cost of living changes in the U.S. over recent years (actually, decades) here: https://www.manhattan-institute.org/reevaluating-prosperity-of-american-family). It is a must-read paper for economics students, analysts and policymakers.

His key argument is that: "Economists and families see three things differently:

  • Quality Adjustment. Products and services that rise substantially in price but in proportion to measured quality improvements can become unaffordable, while having no effect on inflation.
  • Risk-Sharing. New products and services can increase costs for the entire population yet deliver benefits to only a very small share, while having no effect on inflation.
  • Social Norms. Society-wide changes in behaviors and expectations can alter the value or necessity of a good or service, while having no effect on inflation."
In other words, over time, official inflation starts to measure something entirely different than the real and comparable across time consumption expenditure. As the result, you can have a paradox of today: low inflation is associated with falling affordability of life. 

An example: "In 1985, ... it would require 30 weeks of the median weekly wage to afford a three-bedroom house at the 40th percentile of a local market’s prices, a family health-insurance premium, a semester of public college, and the operation of a vehicle. By 2018, ... a full-time job was insufficient to afford these items, let alone the others that a household needs."

To address some of the shortcomings of the inflation measures, Cass offers a different metric, called COTI - Cost of Thriving Index - which basically amounts to the number of weeks that a given line of expenditure requires in terms of median income. Or "Weeks of Income Needed to Cover Major Household Expenditures". Two charts below illustrate:



And here is a summary table:

Excluding food, other necessities and looking solely at Housing, Health Insurance, Transport and College Education, the number of weeks of work at an overall median wage required to cover the basics of the necessary expenditure is now in excess of 58.4 weeks. For female workers' median wage, the number is 65.6 weeks. 

Which means that even before you consider other necessities purchases, and before you consider taxes, you are either dipping massively into debt or require a second income to cover these. 

Note: these do not account for income taxes, state taxes, property taxes, dental insurance. These numbers do not cover payments for water, gas, electricity. There is no mandatory car insurance included. No allowances for deductibles coverage savings (e.g. HSAs). No childcare, no children expenditures, no food purchases, and so on.

And even with all these exclusions, median income cannot afford the basics of living in today's America. 

A word from Fed, anyone?

16/5/19: Identifying Debt Bubble 4.0


Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:


The periods of significant leverage in the U.S. economy have been identified as follows:

  • First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
  • Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
  • Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
  • Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
  • Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.
I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government. 


4/4/2019: Debt Relief for Households: It Turns Out to be a Great Idea, Folks


The question of debt relief for households during the periods of financial crises has been a pressing one in the aftermath of the 2008 Global Financial Crisis. I have written a lot on the topic in topic in the past, but to sum the arguments here in a brief format:

  • Argument in favour of debt relief: households carrying unsustainable debt burden during the crisis are likely to substantially reduce current and future consumption and investment, including long term investment in education, health and other activities. The resulting decline in the aggregate demand is likely to be prolonged and extensive, with a positive correlation to the crisis-triggered recession. Thus, debt relief via direct debt forgiveness and/or generous bankruptcy writedowns can help ameliorate adverse shocks to employment, demand and investment during large scale crises;
  • Argument against debt relief: debt relief can lead to the emergence of moral hazard (inducing greater leveraging by households post-crises), and adversely impact balancesheets of the lending institutions.

I favour the first argument, based on my view that the economy is crucially dependent on households' financial health, and that moral hazard consideration does not apply ex post the crisis, but only ex ante, which means that policymakers can tackle adverse effects of moral hazard after debt forgiveness in the wake of the structural crises.

A new paper by Auclert, Adrien and Dobbie, Will and Goldsmith-Pinkham, Paul S., titled "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession" (CEPR Discussion Paper No. DP13598: https://ssrn.com/abstract=3360065) tries to settle the debate.

The paper argues that "the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession." The authors "document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states,... [showing that] the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent."

More specifically, the model of debt forgiveness effects developed by the authors "implies that ex-post debt relief had positive effects on employment in ...sectors and in ...regions. Ex-post debt relief directly increases spending and employment in both sectors [tradables and non-tradables] in the high--[debt]-exemption region, which increases tradable employment in the low-[debt]-exemption region through a demand spillover effect. The increase in tradable employment in the low-exemption
region then increases non-tradable spending and employment in that region. Calibrating the model
to the observed path of debt write-downs during the financial crisis, we find that average employment across regions in the second half of 2009 would have been almost 2 percent lower in both the
non-tradable and the tradable sector in the absence of the ex-post debt forgiveness provided by the
consumer bankruptcy system."

Furthermore, the authors "conclude by using the model to conduct three policy counterfactuals.

  • First, we ask how the effect of ex-post debt relief changes in normal times when the zero lower bound does not bind. We find that even with a relatively aggressive monetary policy response, debt relief continues to have positive effects in both regions and in both sectors. 
  • Second, we ask how the effect of debt relief changes with the size of the relief provided to borrowers. We find that the debt relief multiplier is initially invariant to the size of the relief provided to borrowers, but eventually falls as the size of debt relief grows large due to the concavity of borrowers’ consumption functions. [see chart]
  • Finally, we ask how the effect of ex-post debt relief changes with the location of the savers that pay for the relief provided to borrowers. We find that the debt relief multiplier is invariant to the location of these savers, as savers smooth consumption in response to wealth transfers no matter where they are located."

4/4/2019: Debt Relief for Households: It Turns Out to be a Great Idea, Folks


The question of debt relief for households during the periods of financial crises has been a pressing one in the aftermath of the 2008 Global Financial Crisis. I have written a lot on the topic in topic in the past, but to sum the arguments here in a brief format:

  • Argument in favour of debt relief: households carrying unsustainable debt burden during the crisis are likely to substantially reduce current and future consumption and investment, including long term investment in education, health and other activities. The resulting decline in the aggregate demand is likely to be prolonged and extensive, with a positive correlation to the crisis-triggered recession. Thus, debt relief via direct debt forgiveness and/or generous bankruptcy writedowns can help ameliorate adverse shocks to employment, demand and investment during large scale crises;
  • Argument against debt relief: debt relief can lead to the emergence of moral hazard (inducing greater leveraging by households post-crises), and adversely impact balancesheets of the lending institutions.

I favour the first argument, based on my view that the economy is crucially dependent on households' financial health, and that moral hazard consideration does not apply ex post the crisis, but only ex ante, which means that policymakers can tackle adverse effects of moral hazard after debt forgiveness in the wake of the structural crises.

A new paper by Auclert, Adrien and Dobbie, Will and Goldsmith-Pinkham, Paul S., titled "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession" (CEPR Discussion Paper No. DP13598: https://ssrn.com/abstract=3360065) tries to settle the debate.

The paper argues that "the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession." The authors "document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states,... [showing that] the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent."

More specifically, the model of debt forgiveness effects developed by the authors "implies that ex-post debt relief had positive effects on employment in ...sectors and in ...regions. Ex-post debt relief directly increases spending and employment in both sectors [tradables and non-tradables] in the high--[debt]-exemption region, which increases tradable employment in the low-[debt]-exemption region through a demand spillover effect. The increase in tradable employment in the low-exemption
region then increases non-tradable spending and employment in that region. Calibrating the model
to the observed path of debt write-downs during the financial crisis, we find that average employment across regions in the second half of 2009 would have been almost 2 percent lower in both the
non-tradable and the tradable sector in the absence of the ex-post debt forgiveness provided by the
consumer bankruptcy system."

Furthermore, the authors "conclude by using the model to conduct three policy counterfactuals.

  • First, we ask how the effect of ex-post debt relief changes in normal times when the zero lower bound does not bind. We find that even with a relatively aggressive monetary policy response, debt relief continues to have positive effects in both regions and in both sectors. 
  • Second, we ask how the effect of debt relief changes with the size of the relief provided to borrowers. We find that the debt relief multiplier is initially invariant to the size of the relief provided to borrowers, but eventually falls as the size of debt relief grows large due to the concavity of borrowers’ consumption functions. [see chart]
  • Finally, we ask how the effect of ex-post debt relief changes with the location of the savers that pay for the relief provided to borrowers. We find that the debt relief multiplier is invariant to the location of these savers, as savers smooth consumption in response to wealth transfers no matter where they are located."