'In standard macroeconomic models, household debt plays a limited role: although it affects households’ ability to smooth out consumption, it is not by itself a major determinant of consumption. Yet household debt has been at the centre of many recent financial crises and recessions. Over the past decade, at least three strands of evidence have emerged about the relationship between household indebtedness and growth. (p. 3)
..
Our results suggest that debt boosts consumption and GDP growth in the short run, with the bulk of the impact of increased indebtedness passing through the real economy in the space of one year. However, the long-run negative effects of debt eventually outweigh their short-term positive effects, with household debt accumulation ultimately proving to be a drag on growth. Our estimates suggest that a 1 percentage point increase in the household debt-to-GDP ratio tends to lower output growth in the long run by 0.1 percentage point, suggesting that policy makers face non-trivial, real costs in stimulating the economy through credit expansion. These findings are robust to alternative lag structures and control variables. Our analysis of the threshold effect suggests that the negative long-run impact of household debt on consumption growth intensifies as the household debt-to-GDPratio exceeds a threshold of 60%. The estimated threshold is somewhat larger for GDP growth, with the negative debt effects intensifying as the household debt-to-GDP ratio exceeds 80%. Interestingly, our findings are roughly in line with those of several recent studies on public sector indebtedness, which have found similar thresholds for the public debt-to-GDP ratio (eg Cecchetti et al (2012)).' (p. 5 & 6)
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The real effects of household debt in the short and long run, January 2017
'Debt’s our number one global economic issue. A beautiful deleveraging balances the risks of deflation and inflation. Such risks exist on both ends of the spectrum. For now, inflation is raising its head but I feel the massive debt levels and rising rates will kick us right back into deflation. I see secular deflation and short-term cyclical inflation as the current trend. Higher rates over the coming year or so are a massive economic drag due to the implications of higher rates on debt, thus leading to the next recession… best guess 2019 or 2020 – though no current sign On My Radar.'
- Steve Blumenthal,
What I Learned at (Camp Kotok) Fishing Camp, August 10, 2018
'When I began posting the CBB almost twenty years ago, my focus was on "money" and Credit and the U.S. boom. I didn't anticipate geopolitical developments would some day play a role in my analysis. But I also never contemplated a global Bubble of today's dimensions and characteristics.
I never imagined how an explosion of government debt and central bank Credit would be used so recklessly to inflate intertwined Bubbles spanning the globe. Never did I contemplate how this new age global "system" - already highly unstable two decades ago - would be nurtured, backstopped and resuscitated into today's monstrosity. I never could have envisioned how the U.S. would run huge Current Account Deficits for another 20 years and still maintain such command over a dollar-based global financial apparatus. Who would have believed a global financial arms race was even possible - amidst such escalating animosity and hostility?
This is a strange period. It's strange here at home - in society, in politics and in the markets. It is strange globally. The unprecedented nature of what we see at home, abroad and in the markets provides a lot of leeway with interpretation and analysis. Somehow, there's a dominant contingent that believes the U.S. is on the right course - that the economic boom will accelerate, markets will, as they always do, continue to rise. The future is bright, all the polarization and social angst notwithstanding. Markets offer unassailable confirmation.
It would be great if the optimists were right. But this was a week that corroborated a much darker interpretation of developments. A decade of unrelenting easy "money" and booming finance has masked a metastasis of festering issues - financial, economic, social and geopolitical. And we're now only a more general bursting of the global financial Bubble away from having to simultaneously face a bevy of very serious issues. As they tend to do, developments can seem to move at glacial pace - and then, rather suddenly, they can be more akin to lava.
As I have posited repeatedly and expounded in more detail last week, the global Bubble has been pierced at the "periphery." I also believe the backdrop is now conducive to contagion at the "periphery" (finally) gravitating toward the "core." The Turkey-induced risk aversion that erupted this week in European equities (bank shares!) is an important escalation in "Periphery to Core Crisis Dynamics." "Risk off" is gaining a firm foothold, and global financial conditions now tighten by the week. Market pundits expect cooler heads in Ankara and Washington to prevail over the weekend. If not, it could intensify what was already a particularly long and hot summer.'
- Doug Noland,
Turkey (Nudged Over the Cliff), August 11, 2018
Context'After decades of overuse, debt is increasingly less productive in all of these areas..''The ongoing "global government finance Bubble" is unique in history'..an escalation of the unfolding EM crisis..'