Study of Household Debt

A great method for understanding Economics consists of comparison between different economies, especially going beyond the macroeconomic levels to consider individual households. This is why David Smith posted such a gem in this article. It is a comparison of Household Debt between nations, study of new wealth in compared nations, and who actually holds the Debt. It shows very interesting highlights in the overall Debt picture in the Developed Countries.

Now to get to theory from what Smith provided:

The first element to be outlined is the probable fact that Debt-Holding by Households is reserved for a minority of Households; i.e., there is a planned madness to Debt accumulation, and most Households manage to overcome the Debt load which they assume. This would be easier to understand if there was detailed data out there in the blogosphere on the average Ages of the Debt. People mostly manage to pay off their Debt load, and within the structure of the Debt. Still, a small minority exhibit a truly expansionary Debt load; they being the most likely to wind up in Bankruptcy. Smith does not provide the data, but these Households may be composed of ‘Type A’ Heads of Households, who are determined to increase the net wealth of the Household in the long-term.

It is these expansionary Households who are most likely to incur insolvency from an increase of Interest rates; they pushing the Envelope with high Debt Service to Income. They, though, obtain the greatest net wealth if they can survive the path past Bankruptcy. These Households are also the most likely to have the least recourse to alternate forms of revenue (aid from Parents, or other elements of Debt-shifting). They are still the driving force of almost every Generation. An increase of Interest rates is a direct assault upon these Households, who if they survive, will evolve into the primary leadership of their own Generation. One has to ask if Policy Managers actually desire to drive these Households into Bankruptcy?

It is also interesting that Italy holds among the highest levels of Debt, but also the highest levels of net wealth. This is speculative, but it likely has the highest level of Residential Cost to Income, and the least level of Product mix (smallest distribution of Product variety, and highest Average level of variance between High and Low Pricing between competing Products). This creates the greatest distinction between Income levels and Living Styles. lgl