Economic System Failures: the U.S. case

De Koning, Kees (2013): Economic System Failures: the U.S. case.

Abstract

Tax Freedom Day memorises the day in a calendar year that individual households no longer transfer their income to their government, but start earning an income for the household. In the same manner one could also define a “Debt Freedom Day” as the day that individual households no longer have to repay government debt.

Income and debt are the two economic features which tie together individual households with the company sector, the banks, the central bank, the pension funds and their government. The economic system failures -very evident since 2008- occur as a consequence of the accumulation of debt (its volume), the price paid for the debt, the maturity of the debt entered into as well as the transfer systems used to transfer debt risks back to individual households without them having any say over whether they would like such risks or not. Individual households are always the ultimate income and debt “bearers” in a country.

For most countries the “Debt Freedom Day” is a long way off and many unborn babies will have to carry the implications of current decisions during their future working life. It is for this reason that more thought needs to be given to the volume and the price of different types of debts affecting individual households and to the transfer systems which have been set up to provide benefits for a few but transfer the risks of money flows to the masses.

To draw specific conclusions it is easiest to use a specific country example. In this paper the U.S. situation has been chosen, as it, among developed nations, provides the highest quality of statistically relevant data within the shortest time period.

The analysis focuses on the excessive home mortgage lending levels in the U.S. over the period 2000-2006; excessive in relation to the income growth of individual households. It emphasizes that financial markets in their lending activities are not guided by the same principles as companies; supply of credit is a judgement of the long term income earning capacity, not the use of such household’s income in acquiring products and services. It also points out that collectively the financial sector can easily overestimate such households’ capacity for their own short term gains. No management system is in place to manage the growth and the quality of the national households’ mortgage portfolio, neither in the U.S. nor elsewhere. Once reality sets in and losses are recognised, the reverse process of less credit, lower house building levels and lower house prices set in. Individual households adjust their spending levels by reducing their outstanding debt, to the detriment of demand levels. Companies will react by slowing down investments, laying off workers and reducing pay levels below price rises. The Fed responded by buying up debt titles to the extent of $ 2 trillion. This money was neither earned, nor borrowed, but just printed.

• Item Type: MPRA Paper
• Language: English
• Keywords: mortgage debt, households income, Fannie Mae and Freddy Mac,Federal Reserve bank, quantitative easing, economic easing, pension funds
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

B.100 Balance Sheet of Households and Nonprofit Organizations, Quarterly and Annual Statistics, produced by the Federal Reserve Bank, St.Louis, U.S.

Bank of England Pension Fund Report and Financial Statement issued 29th February 2012, Bank of England, London U.K.

Debt Management Office, U.K. Breakdown of gilts portfolio, London, U.K.

Debt, equity and income: limits to the freedom of choices in an economy, by Drs Kees De Koning, MPRA paper 47088 16th May 2013 and further references included in the paper.