hrothgar, on 2012-October-23, 16:14, said:
Your argument is flawed on any number of levels.
(1) First and foremost, you're completely ignoring rational expectations. Borrowers and lenders both bake expectations about inflation into interest rates. The only time that you end up having any kind of real wealth transfer is when the real inflation rate deviates from the expected inflation rate. Almost by definition, these unexpected shocks can operate in either direction. The real inflation rate can be higher than expected, in which case there will be a wealth from lenders to borrowers. However, just as likely that the inflation rate will be lower than expected in which the wealth transfer moves in the opposite direction.
(2) Equally significant, you seem to be assuming that there is some strong causal relationship between income level and borrowing. My understanding is that demographic characteristics tend to define borrowing habits. People take out large loads to purchases houses and pay for education. There are definitely some members of society who get trapped in revolving credit cycles, payday loans and the like. However, give the ridiculous interest rates that these folks are paying, I'd be hard pressed to claim that there is much of a wealth transfer going on. (Indeed, given the high interest rates that these folks are paying, deviations from expected inflation is trivial at best)
(1) This is true, but it isnt the point. A savings glut can drive the natural rate of interest below inflation. Rational expectations are irrelevant: I know that my loan will only earn my 1%, which is less than inflation, but it is still better than 0% which is what I get for cash. We are living in a time when real interest rates in China are about 4% below inflation there, and yet people still lend money in huge amounts. Any time the interest rate is below (expected) inflation, there is a wealth transfer to the borrower. That much, at least, is clear.
(2) So debt is very complicated. You are right, that in the US, right now, borrowing and lending vary over life cycles. This is because most of the (visible) borrowing most people do is tied up in their mortgage. But this is not the only story. For example, it seems clear to me that lower interest rates persuade people to bid more for houses, and take out bigger mortgages and hence the debt level tends to increase as interest rates fall. Thus a correlation between low interest rates and high inequality looks causative - people naturally take on more debt when interest rates are lower. Also, unsecured debt, like credit cards, has expanded hugely over the last twenty years, and cannot be explained by demographics. Also, I did specifically say that I was unsure of the direction of causation, but the data shows a huge correlation between debt levels and gini coefficients.
I think part of it is that the rise of the professional classes has led to a lot of workers who expect to be paid more every year as they get more experienced. Lawyers, programmers, finance professionals etc. All these jobs the value of the worker goes up with experience. In such cases it is clearly more rational to take on debt early on, and pay it off in your fifties when your kids have finished college and you are entering the highest paid segment of your career.
The physics is theoretical, but the fun is real. - Sheldon Cooper
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