"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Friday, September 27, 2013

Debt and demand by Ryan Avent
I don't get this. I don't understand why we would assume that pre-crisis demand was supported by or in any way dependent on higher levels of indebtedness.

I have a sense for what the story is (or one story is). Imagine (if you can) that America has experienced steady growth in income inequality, which has effectively concentrated an ever larger share of income in the hands of households with a lower marginal propensity to consume. Other things equal, such a shift in the income distribution will reduce demand and require a lower real interest rate to match desired saving with desired investment. The Federal Reserve, conscious of the need to keep demand near potential, dutifully pushed down its policy interest rate in an effort to reduce real interest rates (and was
successful). This encouraged non-rich households to take on ever more debt, the better to generate higher levels of investment, mostly in the form of single-family homes. It simultaneously encouraged yield-conscious rich households to seek ways to channel their savings, via new financial products, into higher yielding debt instruments. Desired saving and desired investment balanced through the magic of Wall Street wizardry and everyone made out like bandits until the world nearly ended. Now, the Fed is trying to balance desired saving and desired investment once again, but it is finding it difficult to do. In part this is because deleveraging continues, but it may also be because new financial rules are blocking the flow of credit from rich households to non-rich, which is necessary to restore adequate demand.  
Does this story make sense? I'm not so sure. Part of the difficulty is in knowing what is driving what. But let's consider one thing. The trend in private-sector indebtedness moves very closely with the trend in America's current-account balance.

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