American Households Not as Reckless as You Think
http://motherjones.com/kevin-drum/2012/02/american-households-not-reckless-you-thinkEverybody knows that household debt in America has increased dramatically over the past few decades. But why? One possibility is that we've all been borrowing recklessly and living wildly beyond our means. But there are other possibilities too. Your debt-to-income ratio will go up if (a) your debt increases or (b) your income declines, and that can happen in several ways:
* If you borrow more, your debt burden goes up.
* If interest rates go up, your debt burden goes up even if you're borrowing the same amount as before.
* If your income goes down (or grows more slowly than it used to, preventing you from paying down your debt at previous rates), your debt-to-income ratio increases.
* If inflation falls, your debt level doesn't erode as quickly and your debt-to-income ratio may increase.
So which is it? Josh Mason and Arjun Jayadev recently decided to take the standard formula for decomposing public-sector debt changes and apply it to household debt over the past century or so. What they discovered was that although households did increase their borrowing during the housing bubble era (2000-06), that hasn't been a general trend over the past few decades. It's the other stuff that's changed:
'If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation.'
***more at link
salvorhardin
(9,995 posts)Don't get me wrong -- it's still a great article. It's a different analysis from Warren's analysis, so it's nice to have more evidence to back her up.
Link: https://docs.google.com/viewer?url=http://www.yale.edu/law/leo/052005/papers/Warren.pdf
nt
Newest Reality
(12,712 posts)statistics show that over thirty-years of relatively flat wages has been a major contributor to debt issues, generally speaking.
One interesting and compelling theory is that the low pay-scales for average people was filled-in by easily available credit. In other words, credit became a way to capitalize on the lack of compensation and provided a means to profit from the discrepancy.
To me, that indicates that the predominate factor is about maintaining a certain economic level, not extravagant, reckless spending.
While cutting down on frivolous things that are, culturally induced as "must haves" is another way to go, comfort levels are an issue for many people.
A debt-based economy entices its members to create debt as an important means of profit for the lenders. It is rather simple and basic.
We become parties in a lucrative, transaction paradigm of draining and long-term, economic commitment/attachment to the Status Quo, rather than enrichment of the general population.
As we can see more clearly now, the money flows upwards, and they way it is structured, it seems that the methods involved are not made transparent to the unwitting participants. Now, the effort is to keep the wealth accrued floating at the top, at all costs.