Monday, May 07, 2012

Debt to Income

The debt-to-income ratio shows how indebted consumers are relative to income. A rising ratio indicates that consumers are taking on greater debt burdens with respect to income growth. In a growing economy, this may not be dangerous. However, indebtedness could quickly become a problem if income and employment conditions turn around. The yearly change in debt outstanding shows yearly trends in debt growth and tends to be less volatile than the monthly change.

A balance sheet recession means consumers are overly indebted and future income will be directed to debt repayment rather than consumption. Aggregate demand can be surpressed for a long time and hence the economic growth and job creation.

A balanced economic growth means a good balance between production and consumption. This usually implies a healthy balance sheet and the debt-to-inomce ratio is not too high.

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