Yesterday’s report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.
I don’t know who else has made this point, but it’s quite clear that we’re in serious paradox of thrift territory here. Or perhaps more accurately, we’re in a paradox of debt. Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.
He calls this process, following Edgeworth, "damnification", but, as he says in an earlier post, there's another, even more problematic form of damnification (or as Jagdish Bhagwati would have called it “immiserizing growth"), that can confront an economy which is deleveraging and contracting at one and the same time - as the US and Spain are currently doing, and that is price deflation.
But there’s at least one more form of damnification that has me really worried: the paradox of deflation. An individual company or worker can preserve a business or a job by accepting a lower price; but when everyone does it, we get debt deflation — a rising real burden of debt, which weighs on the economy — and also start to have deflationary expectations built into lending and investment decisions, which further depresses the economy. And once you’re in a deflationary trap, it’s very hard to get out.
Now, according to the Bank of Spain in its latest quarterly report on the Spanish economy..... "job destruction and the tightening of financing conditions also contributed to the scaling back by consumers of their spending decisions, dampening the expansionary effects on disposable income stemming from the rise in wages, lower infl ation and the fiscal impulse linked to the personal income tax deduction applied in June. All these factors, along with the reduction in the real value of household wealth, are prompting a rapid recovery in the household saving ratio, which rose in Q3 to 11.9% of disposable income in cumulative four quarter terms, compared with 10.2% on average in 2007".
Now I haven't done any calculations here either, but I would say, along with Krugman, that almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more here in Spain too, and not only that, as I was arguing yesterday, the second form of damnification is about to arrive. Better never to have reached this point, but, unfortunately, there is no turning back the clock now.
3 comments:
Hello Edwards,
What Krugman and others - especially Nobel prizes - won't say "There is no other way to correct such imbalances than a rough diet first, rebalancing always comes next".
Those politically-correct economists who believe that you can transform a walmar-and-consumer-driven, consuming economy into a decently producing one without pain and havoc will certainly have their due share of TV prime time.
But in the end there is no free lunch except possibly in economists' theories... And no automatic rebalancing using monetary tuning and "forceful budget deficits".
The drive to rebalancing will come from restrain, pain and hard work. In Spain as well in quite a few other places.
I'm dead certain that older Spaniards understand what I'm talking about... Do not take me wrong. There is no pleasure at this on my side.
I hope and believe - from what my friends with relatives in Spain told me - that Spaniards will display courage in these difficult times.
Let us Zapaterro offers the welfare support that will be required. Because it will certainly be needed.
More than TGV lines...
Consumers should ignore the commentary admonishing them of spreading “weakness,” and “lacking confidence.”
http://pacificgatepost.blogspot.com/2009/02/obama-watch-consumers-and-learn.html
Stay the course.
Kudos for this insightful analysis. The football story is magnificent! In fact, I’m afraid that Spain lacks the political means to get itself anywhere near the end of the tunnel in this crisis.
All those autonomias are little more than typical Mezzogiorno structures of shifty patronage which in brighter times just managed to break up the market into a regulatory nightmare, not to name the dilemma about to whom one had to pay off (the regional gov, the ayuntamiento or the ever present intermediario) to get that license like in the recent photovoltaic bubble; but now, when everybody is just trying to survive the deflationary maelstrom, that’s the sort of luxury nobody can afford, and least of all Spain, with its ingrained dependency on foreign financing.
Now, Zapatero epitomizes the problem. He may arguably be the most incompetent premier in Europe right now, but the represents the return of the “primacy of politics” ideology. He has a serious knowledge gap and really seems to believe that banks MUST give credit because the political power says so. He pours € 8 bn down the drain with that remake of Louis Blanc’s ateliers nationnaux and really believes that’ll get to job done. It’s the postmodernistic, caring version of what Hitler said to Hjalmar Schacht when he fired him after he fixed hyperinflation, something like “now, economics must yield to political will”. Hitler had then to start a war to fix the German economy, but Zapatero can’t neither start a war or devalue the currency into competitiveness.
With the autonomias, its political class and Zapatero at the wheel, I’m afraid Spain is beyond repair.
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