Professor Martha Olney
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Real Exchange Rate
NX = GX – IM
From Y = AD to S = I
Role of Interest Rate
In the News
Hello. Welcome back. Before we start, there are
two pieces of news that I would like to share with
you. First, from the Calculated Risk Blog
(CalculatedRiskBlog.com), the Fed has issued its
monthly report on consumer credit for the month of
August. Consumer credit means non-mortgage
Outstanding consumer credit debt
experienced a 13% drop. This is the largest drop
ever. We are in unchartered territory here.
revolving credit, such as student loans, auto loans,
and personal loans fell by 1.5%. This number is low
due to the Cash for Clunkers program, which
spurred car sales in the month of August. As a
result, auto sales were concentrated in that month
rather than spread out.
If consumers are paying down debt,
spending? They are not spending. Paying down debt
is categorized as savings according to
macroeconomists. In the short-run, this does not
help the recession. This is not behavior that is
consistent with the idea that consumers will lead us
out of the recession. This is evidence that
consumers are balancing their balance sheet. The
difference between what you own, assets, and what
you owe, liabilities, is your household balance
By paying down debt, people are getting
their household balance sheets back in order. This
may be a precursor to consumers spending more
again once they get their debt down to a more
manageable level. On the other hand, there may
have been a cultural shift in attitudes toward the
propriety of debt. In the 1980s and 1990s, there was
in American culture a strong consumerist mentality.
However, there seems to have been a shift away
from this culture of spending as if there’s no
tomorrow, borrowing against your house, and going
into debt to finance your expenses. If this is the
case, then this rebalancing will not be followed by
an increase in spending. It seems that consumers
will not be the ones to lead us out of the recession.
While this is good for individuals, this is not
necessarily good for the economy.
So if people are saving more, it will be
good for long-run growth. But Keynes said that in
the long-run we are dead. Also, when we save
more, we are spending less.
This precisely characterizes the tension between the