I will start with providing this Link, and then turn to a slightly different analysis, even though I totally agree with Mike Shedlock on this Issue. I want to examine the situation from the point of view of the Consuming Household. They have primary Labor Income, and Secondary Income from whatever Investment and Retirement Portfolios they possess. Primary Labor Income is basically examined from the viewpoint of Pay per Hour or bi-weekly Salary. Secondary Income from Investments is graded by Percentage gain in total capital. The first suffers from total elimination at much greater rate than reduction of Pay. The later suffers almost totally from reduction of Return, though there is the hazard of total investment loss–rare, but always potentially existent. Now We must examine How each of these Incomes affect Consumption by the Household.
I will first answer Those who will point out I didn’t mention the hazard of reduced Hours of Work; this I don’t consider because this late in the Recovery (???), Partial Labor has already been primarily set. The elimination threat of Primary Labor Income may be Mild or Acute, but the possibility has little affect at this time, all due to the fact that Household Needs remain Constant, and are not permanently deniable. Primary Labor Income, therefore, has little impact on Consumption patterns at this late stage, unless there is complete elimination past this Point.
Now We must turn to Secondary Investment Income. Interest rates vitally affect the amount of this Income in that Depositors and/or Bond-holders receive a rate of Return which will pay for an expanded Consumption, or negate the possibility of an expanded Consumption. This is apparent especially in older households, where the adults are above the Age of 50. They are intent upon maximizing their Income before Retirement, or are already in Retirement; meaning that their Income for Discretionary Consumption comes principally from Investment returns. It is also true that Stocks which pay Dividends set that Return in relationship to the reigning Interest rates, as they do not wish to pay more than that which leads to investment in their venture Stock. Now, I don’t want to harp on a thing, but the amount of Discretionary Investment Income actually determines How Much older households are willing to spend on younger households, and Children and Grandchildren will get Shorted in both Gifts and Money; much of which is Clothing and Money for Necessities and Appliances; to say nothing about aid in Mortgage payments.
I have not studied the amounts or degree of Aid provided by older Households to younger Households, but know it is usually extensive and continuous; except when Someone like Ben Bernanke makes the mistake of thinking this natural flow of Income should be short-circuited. Mish has stated that replacement of Necessities is not naturally repetitive, and therefore not expansionary. Myself, I think the corruption of this Secondary flow of Income costs Business about 5 times what they retain in those fanciful Tax Cuts. In any case, low Interest rates are not going to spur anything! lgl