Inflation, growth and crisis resolution in Europe
Macroeconomic analysis demands that a large quantity of statistics, often of questionable quality,
be collated and processed.Therefore economists often resort to approximations in order to detect trends amid the fog of numbers, the primary sources being series of aggregated data.This approach leads to the conclusion that US households are over-indebted; but what would the picture look like if we focused on how this burden of excess debt is spread across the population?
Since 2008, the apparent upward trend in US households’ outstanding borrowings has shifted into reverse.The conclusion seems to be that US households have been tightening their belts, so that demand for loans has dried up altogether, even though interest rates are at close to zero.This behaviour by individual economic actors makes perfectly good sense in view of the potential or actual risk of asset price deflation. As consumers were failing to respond positively to monetary stimulus, the Federal Reserve decided on a second round of quantitative easing, known as QE2. As we wrote late last year, the Fed’s approach to monetary policy was entirely justified and unlikely to lead to escalating inflation, provided that the exit from QE2 was well timed.The timing will be dictated mainly by the speed at which US consumers’finances return to health.This process of running down debt is thus critical. If investors are valuing some assets on the basis of zero interest rates extrapolated in perpetuity, an unexpected Fed shift in monetary policy back to normal mode could prove a huge shock, rather like the mini-crash on bond markets in 1994.