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Wealth, incomes and debt: the blocked channels

De Koning, Kees (2015): Wealth, incomes and debt: the blocked channels.

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Economic growth data does not show how such growth was achieved. Was it based on income growth and consumption spending levels or was it based on borrowings to extend the income levels? The question is vital for deciding which economic tools work best for correcting imbalances. The main imbalances are based on the developments of two key variables: the level of income growth and the level of debt incurred to buy homes, consumer goods and education. The U.S. Balance Sheet of Households and Nonprofit Organizations sums up, very succinctly, the wealth position of households through various asset and liability classes. What a single balance sheet cannot show is how assets, liabilities, incomes and net worth interact. Making use of historical balance sheets provide a better insight. For instance in 1997, the combined liabilities of home mortgages and consumer credits as a percentage of disposable personal income stood at 82.9%. By the end of 2006 this percentage had increased to 123.7%. Per end of 2010 this percentage had dropped to 111.6%, only to drop even further to 96.4% per end of 2014. Student loans have not been included in these figures. If debts grow faster than income levels, one may define such a period as one of overfunding and, when debts grow slower than incomes, underfunding occurs. Overfunding took place in the U.S. from 1998-2007 and underfunding from 2008-2014. Relative positions are important, but the absolute level of incomes growth is essential. During the overfunding period average income levels had a tendency to grow slightly faster than the CPI level, while during the underfunding period average income growth lagged behind the CPI inflation levels. Finally, the spread of income levels around the average is important. Do the lower income groups benefit less from economic growth than the better off? This paper aims to set out why some new economic tools are needed to correct imbalances. They are: (i) the Economic Growth Incentive method (EGIM); (ii) the use of some pension fund savings and (iii) the use of home equity, which is the most illiquid of all savings. All three tools are for temporary use only. In the U.S. at 2014 year-end, pension entitlements stood at $20.8 trillion while owners’ equity in household real estate was valued at $11.25 trillion. In the U.S. such locked up equity positions have not been used as an economic policy tool to speed up or slow down the conversion process from equity to income when economic circumstances require such actions. Neither have future government cash flows been used as an economic policy tool.

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