Monday, November 3, 2014

Large parts of population not benefiting from inflation

I would say the household sector is divided. Wealthy people are doing well. But you have a large number of households that have a very [few] assets so they don’t benefit much from inflation. They have a lot of debt that is being refinanced at low interest rates, but at some point rates are going to go higher, and while the labor market is improving, many people have jobs now that don’t create a lot of wage growth. Wage growth has been anemic. 

So the balance sheets of these households are fragile—lots of debt, very little assets and their P&L in terms of income generation is still sort of mediocre. You add to that $1.3 trillion of student loans, you add to that still a significant level of household debt for those who don’t have many assets, you add to that the sharp increase in sub-prime auto loans and so on, and you have a picture of where maybe the U.S. recovery is going to be more fragile than people make it.