The charts are Fed numbers that show how high debt is compared to incomes. What it shows is that as the govt. deficits increased they added income and savings to the economy which resulted in higher incomes and lower total private debt. In the past the next credit expansion began after the financial obligations ratios came down in this manner.

These are June numbers, and federal deficit spending is what brings them down, so they should be that much lower today.

So while it’s impossible to say exactly how far the ratio of debt to income needs to fall before the next credit expansion will begin, I expect modest growth to continue as it has with very modest job growth and unemployment remaining too high until consumer credit expansion does begin to kick in, which could be anytime now, that the debt ratios are no longer an obstacle.

The right move in August 2008 was a full payroll tax (FICA) holiday which would have sustained demand and prevented the recession and kept unemployment at desired levels.
It was nothing more than policy response that allowed a financial crisis to spill over to the real economy.

The interest rate cuts unfortunately (but predictably) served mainly to reduce spendable interest income as income was transfered from savers to bank net interest margins, and as govt. interest payments to the economy were reduced by the lower rates.

Lowering rates was not ‘wrong,’ as there are positive supply side and distributional effects from lower rates, but what was missed was that lower rates needed to be accompanied by even lower taxes to offset the induced drag of the lower rates.

To date we remain grossly over taxed for the size govt we have and for the current credit conditions, as evidenced by the too large output gap and far too high unemployment rate.

So with China not collapsing as many feared, and the euro zone muddling through with ECB support, my outlook remains positive for the US economy, though from unfortunately high levels of unemployment and true misery due solely to policy blunders.

The Republicans got us into this and the Democrats failed to get us out, and all for the same reason- non of them understand how their own monetary system works.

So thanks in advance for kindly directing everyone you know ‘The 7 Deadly Innocent Frauds of Economic Policy’ here.

Homeowners Financial Obligation Ratio

Financial Obligation Ratio with Rental Payments

Financial Obligation Ratio for Renters

16 Responses

  1. it is interesting how financial obligation ratio for renters is mirror image of financial obligation ratio for homeowner. what happen? overstretch renter become overstretch homeowner?

    warren — also very low rates let borrowers refi into lower payment. that has probably helped financial obligation ratio of homeowner more than anything else.

  2. Warren says “interest rate cuts…reduce spendable interest income as…govt interest payments to the economy were reduced by the lower rates.” Strictly that should be “Fed interest payments to the economy were reduced……” shouldn’t it?

    Also reduced Fed “payments to the economy” mean increased Fed profit sent to the Treasury at the year end. And that in turn means less tax and/or more govt spending. Thus I suggest interest rate changes do not change Fed/govt “payments to the economy”.

  3. Warren, I know you always state that low interest rates result in a transfer of wealth to banks but I get confused by this on a practical level. Both my student loans and mortgage are variable and the lower rates over the last 2 years has literally meant $100’s extra in my pocket per month to spend. Just some clarification on this from you, or anyone here…

    1. yes, not for all loans. some older floaters did come down like that.

      but looking at bank interest margins going from maybe 2% to maybe 4% means costs of funds came down faster than loan charges overall

  4. “To date we remain grossly over taxed for the size govt we have and for the current credit conditions,”

    1) I see banks restricting credit faster than financial obligation ratio’s fall.
    2) My guess is most of the fall in the ratio is coming through methods that ruin credit ratings (short sales, bankruptcy, etc.) so will impede lending for years.

      1. Hmmm…. Is there any info on average credit ratings over the years? Belly of the market would be most telling. History of application rejections plotted against it would be interesting too.

      2. Hard to forecast a lending rebound with so many factors in play.

        Someone at the Fed likely does relate bank lending standards and FICO scores to the financial burden ratio to see the likely bank lending to households .

        Current situation would likely see…

        Bank lending standards getting worse
        Fico scores getting worse


        Financial burden ratio is getting better

        All three are in play.

        FICO is affected for a different/longer period than lending standards. I’ve read a short sale will keep you from borrowing from Fannie for 2 years (5 years for a foreclosure), while your short sale adjusted FICO score might not make it worth your while for a few years more.

  5. Hello Warren.

    The charts – especially the first one – have me curious as to what they actually represent. It appears to show a huge fall in 2 years of the homeowners financial obligation ratio, back to levels just above the beginning of the real estate boom in the US. It can’t include mortgage debt. You can’t simply de-lever from such debt, it will exist for decades. Only bakruptcy could lower such debt so rapidly (I read recently that most de-leveraging currently occurring in the US is forecloseures).

    As far as I am aware, homeowners in the US (and right around the modern world) are saddled with the highest level of debt to income in history so I have some difficulty believing that a new credit expansion is about to kick off, especially with so many currently in negative equity.

  6. So, as a layperson, I have to ask this:

    What is actionable inflation? Real-world, gotta raise taxes or we’re all going to Hell kind of inflation, in MMT terms? Really, what do you measure?

    I understand that increased cost of doing business isn’t inflation, but how much would it cost to produce a ’66 Mustang today, just as it was built back then? Same emissions, same MPG, no airbags or 5 mph bumpers, just as it was spec’d back then.

  7. Off topic: Martin Wolf of the Financial Times now an MMTer? He published an article today suggesting a cut in Britain’s “national insurance contributions” (that’s a payroll tax designed to fund the social security system). He suggests this be funded by government borrowing from the central bank. Well that’s plain old money printing. See last three paragraphs in particular at:

    1. Ralph, Martin was out with another MMT-based article yesterday in which he used the term “austerian,” coined by Rob Parteneau and usually found only in MMT-rated stuff. In the article you cite he uses the fire/water analogy that Marshall Auerback used yesterday. He has also referred to the sectoral balance approach in the past. I and others have written MMT-based comment at his exchange, which he would certainly have seen. So I would say that he is reading MMT-based stuff. He must also be aware of Wynne Godley’s work, I would think. Looks like he is coming aboard. The last mile is closing substantially.

    2. yes, the UK needs to stop taking so much money out of its economy, one way or another. Also, the nat health ins may be underfunded based on waiting times, etc? Just a thought.

      and borrowing from the bank of england vs issuing debt doesn’t matter for the real economy. it only might alter the term structure of interest rates.

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