Archive | November 23, 2012

Household Debt is Down, but What Does That Mean?

Household debt to GDP

Household debt is down. Way down. After steadily increasing from 2000 until the end of 2009 (during the freewheeling economic bubble), American households are down to approximately owing 83% of GDP. The good news is the number is continuing to shrink.

Not only that, according to the Washington Post (“Five economic trends to be thankful for”), the cost of servicing that debt is also down. Previously, American households were spending more than 14% of their disposable income on debt repayments. Now, they only spend 10%.

This is great news. Households, rather than chaining themselves into stagnation through crippling interest repayments (which don’t help American workers at all), are able to spend that money doing things that give regular people paychecks.

This plot (from the Calculated Risk blog), though, makes the picture a bit more nuanced, however.

Nearly all the reductions in debt are due to declines in the amount of money owed on mortgages. Student loan debt, however is increasing. This is partly good. People are likely living in houses more inline with market prices and what they can afford. At the same time, unemployment is sending more and more people back to school.

While I’m all about people getting educated, I can’t help but think our phenomenon of skyrocketing tuition is merely shifting the debt from one sector to another.

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James Bond and Economics: Shaken and Stirred

James Bond, closet Keynsian

Over my nearly 40 years of watching James Bond movies, it wasn’t until recently that I picked up on what it all meant.

James Bond, a talented 00 agent in MI6, gets sent the world over to thwart the nefarious plans of mad geniuses hell bent on world domination, all the while bagging beautiful women and downing martini after martini. That much is clear.

What was not clear to me, was the deep economic and political significance of the series. The Economist recently ran a blog post on 2006’s Casino Royale as an allegory for the financial meltdown, despite the fact that it appeared two years before.

Le Chiffre, a opportunistic genius who finances international terrorism for profit comes up with an infallible plan to short sell rapidly rising stocks in a airline company, destroy a highly anticipated prototype, then profit off the subsequent crash in stock prices. He does this by investing money that is not his own. The plan, of course, fails, and the “genius” plans to win it all back through a poker game.

This could have been pulled from the playbook of every alcoholic and gambling addict out there. Genius, indeed, but little different from the irresponsible and desperate behavior of market players as the American economic bubble was crashing.

Interestingly, Bond himself, through a couple of poorly planned strategies loses everything and appeals to the Treasury of the United Kingdom (taxpayers) to bail him out. The Treasury rightly refuses, unlike the Government of the United States. Instead of saying no, the US bailed out some of the worst offenders in the banking crisis, effectively rewarding them for gambling stupidly.

Of course, Bond has little to fear. The $50 million dollars that Bond needs is secretly offered up by the Americans as long as they are able to take the credit for the win. This exchange underlines the complex relationship between the UK and the US. Britain, once the largest power in the world, now relies on bailouts from the former colony when it makes stupid mistakes. Amazing.

The villains of the bond world distinguish themselves by not being power-hungry-insecure-would-be-despots (such as the Asgardian Loki in the recent movie the Avengers), but rather as shrewd financial schemers, who wish to manipulate the market to securely enrich themselves.

In this manner, they are no different than food speculators on Wall Street (the gold manipulation scheme in Goldfinger), and not out of step with the ever more obvious trend of the mass privatization of that which should be a public good (see the water scheme in Quantum of Solace).

Of course, not all of these villains are supply siders like the plan to control the worlds solar energy in The Man with the Golden Gun (of course, this ignores the possibility someone else might redevelop the technology and enter the market). Dr. Kananga in Live and Let Die sought to create market demand for his product by getting restaurant patrons hooked on heroin.

The economic depth of 007 was certainly lost of me until I started digging. Truthfully, I really didn’t know what a stock short sale was, but now I do. Perhaps instead of reading wordy economic tomes, we might just make students rewatch Bond movies? It would certainly be more entertaining.

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