WHEN ECONOMISTS DON'T BELIEVE CONSUMERS SHOULD BE RATIONAL:

Household Debt Can Hasten Recovery, When It Goes Unpaid (MARK WHITEHOUSE, 10/26/09, WSJ)

One of the biggest clouds on the economic horizon is the vast amount of debt U.S. households took on during the boom years. The Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what they see as a more sustainable level of 100%.

Well, sure, except that household net worth--which doesn't even include the value of the educations we all borrowed much of that money to pay for--stood at $51.5 trillion at the end of 2008. And by using the after-tax figure you ignore all the money put in pre-tax retirement instruments and the like. Oh, and it makes no economic sense to pay back debt during a deflationary period, especially when a simple stock index fund is paying off so handsomely. Our debt in reality, as opposed to in the imagination of valetudinarians, is too trivial to have much effect on our consumption.

Posted by Orrin Judd at October 25, 2009 9:39 PM