Not Really a Whole Lot More to Say

Debt and Growth

Is there a relationship between debt and growth? If so, what is it? If not, why worry about the level of debt that we or any other countries are accumulating?

To get an answer, we need to look at the impact of both external and internal debt on U.S. growth. And here are a couple of items that address those issues to varying extents.

In the first one, economists at the Federal Reserve Bank of St. Louis, while not looking directly at foreign debt, do look at the correlation of growth rates of major trading partners to the U.S. It shows that our rate of growth has varying correlations with that of some of our trading partners. That means that to varying degrees, their growth affects ours. But is there anything that indicates debt affects growth?

That question takes us to the second item. In a more complex piece on the VoxEU website, economists Carmen Reinhart and Kenneth Rogoff looked at growth rates and debt levels in a number of countries. Their results show that there may be reasons for concern if debt levels get too high. Essentially, very high levels of debt may slow growth. Given the interdependence of a globalized economy, this may explain why many economists are thinking that paring government debt may be helpful in the long run.

I don't think these articles are directly useful for the classroom, but I do think they can provide you with insights to integrate into your discussions and lectures. I welcome your thoughts.

Wealth Transfer and Credit Cards

National Public Radio's Planet Money program had this story on credit card reward programs, yesterday. It's about who uses credit cards, who pays for the benefits, and who receives them. The piece is based largely on this paper from the Federal Reserve Bank of Boston.

My question is "Is this news?" We learn in Economics 101, "There's no such thing as a free lunch." The fact that using credit cards has a cost is something that should be understood by all students, whether in an economics or personal finance course.  Many people don't understand just how significant the revenues from these fees are to card-issuing banks.

This is why some stores will try to charge different prices for cash and for credit from time to time. Those stores are trying to properly allocate the cost. (A quick search indicated a cluster of stories on this back in 2008 when gas prices spiked.)  And it's why retailers have tried repeatedly to get legislation to limit the fees.

As always, I welcome your comments.

Debt Issues...Micro and Macro

I've been busy with my online courses and I hope to get busier. 

Nevertheless, here is a comic that, in my opinion, offers all kinds of possibilities as a discussion starter.


The first and third panels carry the weight. 

The first panel can be related to expectations, the business cycle, and employment. (For those of you unfamiliar with the strip, Gene is the soon-to-graduate college age son of the couple you see.)

The third panel can be used to illustrate credit, debt & deficits, normative statements, business cycle, animal spirits, expectations, and behavioral economics.  And those just hit me in the first minute.  Do you see other possibilities?  If so, please share.

Risk and the Limits of Monetary Policy

Two articles in the newspaper caught my attention this morning. And as they are related, they had more significant impact.

The first was from The Washington Post. Ezra Klein discusses some moves the Fed is said to be contemplating as there are signs the recovery may not be as strong as previously thought. The efforts are largely designed to provide banks with an incentive to lend.


This brings me to the second article, which was in The Wall Street Journal. (Subscriber content at this writing, but put “Risk Aversion Keeps Economy in the Slow Lane” in your browser and you may find a free version. This article talks about risk aversion both by borrowers and lenders. For borrowers, the desire to avoid debt when the future appears shaky is understandable. I suspect you tie in Keynes’ “paradox of thrift” when you discuss this. On the lenders side, it may be more complex. Yes, lenders are reluctant to lend, especially to businesses when the outlook is uncertain. But add the pressure being put on lenders by regulators and the government. The lenders are being chastised (in many cases correctly) for taking on excessive risk. This is being translated by many as “lenders shouldn’t take risk.” Unfortunately, credit involves risk.

We can get into the aspects of maturity risk, liquidity risk, and default risk another time. But when lenders are being chastised for lending, and borrowers are being told that things aren’t as rosy as we would have hoped, the appetite for risk is muted. I look forward to your thoughts.

The Debt Problem(s)

The Economist is known for its excellent coverage of a wide variety of topics. The recent debt crisis is no exception. It just published a special report on the crisis, and it has a number of very good articles. I'm not going to review them all, but I will recommend three of them.

The first, Repent at Leisure, is an excellent overview of debt and explains how borrowing has been a mainstay of personal action and government policy for at least 25 years.

Part two is titled The Morning After, and focuses consumer debt. In some ways, the most telling aspect of the article may lie in its opening paragraph, when a British software developer realizes he has a problem with his credit card bills. His comment is "if they are going to give it to me," referring to the credit line, "I must be able to afford it." It reflects a level of responsibility and self-awareness that is disturbing. And many consumers are guilty of it, willing to shift the fault from to the credit granters. But as Shakespeare might have said of this situation, "The fault lies not in our banks, but in ourselves if we are in debt."

In a Hole is the third article I want to draw your attention to. This one examines the limited options facing nations with large debt overhang, ranging from inflation to slower growth. It does not present any attractive alternatives, and as such could lend itself to a classroom exercise examining choice at the policy level.

All of these articles, as well as the others in the section, link to an interactive graphic that examines debt levels across fourteen countries, showing not only aggregate debt as a percentage of GDP, but breaking down to household, government, financial and non-financial debt. The graphic alone is worth your time. Please share your thoughts.

More Greece (No, I'm not Talking about Cooking)

First, a double HT to Chartporn for these links.
First from The New York Times, comes this simple and easy to understand graphic which focuses on the main players in this financial disturbance.

Next from Flickr, we see this more original and visually appealing take on the European debt crisis. And it's downloadable in a variety of sizes. I especially like the "Debt Trip" and "Debt Trap" visualization in the upper right hand corner. I think that has general application for use with students.

I would welcome you to share your thoughts on these charts as well as your possible uses for the classroom.

Credit on the Personal and Macro Level

A couple of items caught my eye this morning. Both dealt with forms of credit and how these forms relate to the current state of the economy. The first was this article in The Washington Post. The story provides a brief insight into the history of the credit card, as most of us are familiar with it. It goes back to 1981 when the state of South Dakota allowed banks to charge whatever interest rate they wanted on credit cards. This changed the availability and use of credit cards from its previous, more restricted, role.

But the article also examines how credit card losses in the most recent recession have impacted issuing banks; and how new legislation may impact banks' choices on who gets cards. The article makes a convincing argument that credit was too easy, and that this ease led to misuse. And the misuse put many individuals into circumstances that could not withstand an economic downturn and an interruption in income. I understand the logic, but I'm not sure the entire history of the role of credit in this downturn is ready to be written.

And that's because of another interesting piece of the puzzle is brought up in this post on the Voxeu web site. The author is an economist at the Federal Reserve Bank of Boston. And his research is in the role of housing equity in the credit market. Specifically, he looked at how homeowners were using equity in their homes in the period prior to the housing collapse. I have often heard arguments that individuals used escalating home values as collateral for home equity loans and lines of credit, using that credit as if it were an ATM to fund rising standards of living - essentially a mechanism for extracting the wealth from the wealth effect.

The author says his research doesn't support that explanation. Indications are that people were not treating their homes as ATMs to finance current consumption - at least not at the levels previously thought. Rather, his evidence shows that what was extracted may have been used to finance residential and household investment to a greater extent than was previously thought.

All of this made me think of an old but interesting book that I have recommended before and will recommend again: Money of the Mind by James Grant. It more than 15 years old and is in need of a new edition. But the history of credit in the United States from the early 19th to the late 20th century is an interesting one. And there is much in the book that provides a set-up to the current situation. I'll put it on my carousel at left in case anyone is interested. I found it an interesting read and if you like weightier subject-matter, I would even call it a "beach read."

This Is Funny...and a Bit Unnerving

We teach that deficit spending is appropriate in times of trouble.  So where did things go wrong?

I Wonder Who He Is Writing To?

Household Debt

Here are some interesting graphics about the level of U.S. household debt over time. (HT to Chartporn for the link.)

How would you use them? I see some immediate application for personal finance courses. But would the information also be helpful in a regular economics course when discussing levels of debt in an economy, or the topic of loanable funds?

We're Not the Worst....

when it comes to debt, but we're still contenders. See this. (HT to Chartporn.)

More on Greece

The German periodical Der Spiegel has this very good article with some very handy graphics (HT A&L Daily). You can use them in conjunction with the ones mentioned in my post from a couple days ago. What I (and others) like about these is they show that the money is not owed to other nations (implying governments) but to banks and financial institutions. This makes the role of private financial markets clearer, and should bring home the potential for a possible banking crisis.

Graphics on Greek Debt Crisis and Larger Implications

I don't know how many of you have students asking about the Greek debt crisis. I know I was pleased when one of my students asked me to explain why it was relevant. But I ran across a few graphics (HT to the folks at Chartporn once again) that can help your students understand the ties that bind.

This first one is from The Guardian in the U.K. It uses a domino metaphor to show how Greek default would ultimately affect Britain.

This second one is from The New York Times. It's labeled "interactive." Frankly, I don't see it. But it does include all of the countries with major debt problems (Greece, Ireland, Italy, Portugal and Spain). It does remind me of a graphic one of my undergraduate history professors distributed showing the web of alliances in Europe prior to World War I. You should note that Europe's Big Three (Britain, France and Germany) are the most exposed as it is.

The third, also from The New York Times, is interactive and illustrates the debt levels of various European countries a number of ways. 

These can be used to illustrate concepts like fiscal policy, role of government, globalization and interdependence quite well.

Debt, Debtors and Financial Reform

In another confluence of resources, here is an opinion piece that appeared in last Sunday's edition of The Washington Post. It deals with the failure to do anything significant about the national debt, not just now but over the last several decades. What really got my attention was the opening, which referred to Bill Gross, a founder of the investment firm PIMCO and his reluctance to buy any more U.S. debt. In fact, according to the author, Gross is unloading some of his holdings in favor of bonds from other countries. It seems he worries about our commitment to do anything about the national debt.

Of course, there is a recently formed bi-partisan commission that is to address the problem. But, you know what - "been there, done that, got the t-shirt." Some will say, "Yes, but the situation is more serious now. We'll certainly take action." Perhaps.  I think we will hear great statements and see wonderful posturing. These are, after all, the same people who think they can reform the financial system.

This brings me to this next item from The Indianapolis Star.  (HT to Carpe Diem.) Seems to me this may be another Captain Renault moment.

What do you think?

Turning the Corner?

The newest issue of The Economist has a special report on the U.S. economy. It has several components (checkout the links on the right-hand side of the page under "Related Items"). They are all very interesting, and each is fairly short. They touch on a variety of issues discussed in this and many other blogs over the past year or so: savings, institutional issues, international trade, and productivity, just to name a few.

Each article, in addition to laying out solid information, also raises some questions. For example, in both "The End of the Binge" and "Look after the Cents", I was struck by the fact that both authors seemed to overlook the fact that the baby-boomers were among the most-indulged generation in our history. To expect them to switch from spend-thrift to super-saver without a near catastrophe, in hind-sight, was perhaps optimistic - logical, but still optimistic.

Nevertheless, as many of you are preparing for spring break next week, these articles may be worth adding to your "to do" list.

Some Sobering Factoids for Personal Finance

One of the recurring themes about causes for this recession has been the high level of debt the average American carries. Well, here's an amusing and sobering visual from Visual Economics. (It gets high points on the amusement scale for the layout.)

Because most of us have played the referenced game in one form or another, I think it will grab attention in any economics or personal finance course. But what I think makes it doubly effective for personal finance courses is the way it follows a life-cycle. Teachers, let me know the reaction if you share it with your students. Students, let me know the reaction if you share it with your teachers.

Debt and Your Credit Reading

And then again, it may not.

Ahh, the Dangers of Identity Theft

Sometimes It's So Obvious

Here is something for those personal finance courses.

Information is helpful, but it cannot solve the problem alone.

As always, I welcome your comment.