Are Rates Stressful or Are We Barking Up the Wrong Tree?

If it is the wealth effect, and not the consumption-postponement effect, that really drives changes in savings and consumption rates, then raising rates would reduce consumption only if there was a negative correlation between interest rates and wealth. There clearly is in the United States, where most household wealth consists of real estate and s

savings. Typically we associate rising interest rates with declining stock, real estate, and bond prices. If most of our wealth consists of these three kinds of assets, then higher interest rates should be associated with a decline in our wealth, and because we feel poorer, we reduce our consumption rate. This seems fairly plausible too. When we fe

Putting Them Together

The United States is running larger fiscal deficits than most other countries, and its private sector has a higher proportion of long term fixed rate debt than most other countries. This means that in an interest rate hiking cycle, the United States has been rather de-sensitized to rising rates compared to other countries tha

This will result in a continued downward pressure on consumption, making it hard for consumption growth in the next decade to outpace consumption growth in the past decade.

Overall, these trends suggest a very significant shift in the credit landscape. Credit seems to be moving from the supply side (businesses) to the demand side (consumers) of the economy. Considering the state of economic development of India and the relatively low level of per capita GDP, this move appears to be premature. Even within consumer cred