Net Worth Makes You Trustworthy
Eli Dourado has a great post on whether we can believe we’re still in the short run (see Bryan’s critique here). Along the way, Dourado calls into question the sticky debt channel, correctly noting that according to official estimates, household debt payments are at quite low levels–and a big reason is because of today’s low interest rates.
However, the data he draws on for household debt payments don’t report how much households are actually paying: The data instead report “estimated required payments.” Glad to be corrected but that sounds like minimum payments on credit cards, required mortgage payments, etc.
In fact, it looks like households are paying a lot more than required. Here’s the Flow of Funds ratio of total household and nonprofit liabilities over GDP. The Great Deleveraging is proceeding apace, and unless that’s all debt forgiveness and bankruptcy, debt payments appear to be higher than the monthly minimum:
But I don’t think monthly debt payments are the main way that balance sheets matter. After all, when people pay down debt that money goes to somebody else–a lender–who can decide how best to invest the repaid cash.
(Thanks for Bill McBride for creating the graph)