Thursday, February 7, 2013

Learning from David Wessel, Adam Davidson, and a few others

I try to read as many articles as possible from NTY and WSJ. I subscribe to WSJ (ah! the joys of using airline points) and Sunday NYT. There are a few columns that I try to read as carefully as I can, and usually I learn a lot by the end of the column. For instance, David Wessel from WSJ (Capital),  Adam Davidson (he of the Planet Money fame) from the Sunday Magazine of NYT, Gretchen Morgensen from NYT, and Robert Shiller whenever he writes for NYT, Jason Zweig from WSJ, and a few others. Of the lot, I think I learn most from David Wessel (@davidmwessel, artcles can be found here) and Adam Davidson (@pm_adamdavidson, articles can be found here). I find Gretchen Morgensen's articles too really good but most times the details regarding banks and mortgages are a little too much for this economics simpleton. Not that I understand all things written by David Wessel and Adam Davidson - its just that with them I know what I do not understand and can actually articulate them reasonably. My goal from now on is to post every week a write up on David Wessel's Capital column - essentially asking questions that I would ideally like to ask David Wessel but do not have the access to. Maybe some benevolent soul with better understanding of his articles can enlighten me (and others like me).

David Wessel's article on Feb. 7, 2013 is titled "Borrowing: Key to Recession and Recovery". To an extent I can understand the hypothesis. The recession was brought on by excessive debt - debt that US households and financial institutions could not afford. What tripped me in the column is this passage: "And if consumers are borrowing less (because they want to or because no one will lend to them) they will spend less--good for the long-run health of the economy but not so good in the short run." Consumers borrowing less seems good for the long-run health - that seems intuitive. However, why should it be bad in the short run? Is it absolutely imperative that it be debt-fueled spending (borrowed money)? Does it mean that if all US consumers spend only what they consider to be an appropriate fraction of their income, that spending would not be enough to fuel sufficient growth? Is the borrowing really necessary?

From what I understand from the article, a collective impetus to save in these slow-growth times may not be what is required for increasing the growth rate. However, if the savings are all invested in the stock market, which is what people seem to be doing, is that such a bad thing? Why does that not lead to growth? Will growth manifest itself only if we spent on manufactured products or services?

Finally, if you see the chart accompanying David Wessel's article, you will notice that debt-to-GDP ratios for almost all classes of debt are increasing with time. Why is that the case? What are the optimum values for each class of debt?

Now, really finally: US household debt is quoted as one number. However, that must be misleading as different holders of the debt have different probabilities of paying back the debt. So, instead of just the total, there must be a slightly different weighted average that might be a better number, is it not? Is there any such number?

As it is most of the time, any Tom, Dick, or Arvind can ask the questions. It is the really good ones who can give the right answers!

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