20 August 2010

There Ought To Be An Ability To Spend Index

Ability to spend is a product of liquid assets on hand, plus available line of credit balances, plus availability of purchase related purchase money credit. This should be an important economic indicator. One can't buy goods and services if you don't have an ability to spend an amount equal to the purchase price.

But, I haven't seen an indicator like this used. Indeed, some of the important economic indicators that are used, like household debt and savings rates, actually confound this issue. Household debt is an aggregate measure that doesn't tell you how much unused credit people have available. Savings as a macroeconomic measure confounds paying down debt and putting money in a savings account as if they were the same thing.

I presume that this isn't used much because it is hard to measure, but it would capture important impacts on business cycles in the economy, such as the shock that the American economy suffered when many credit card companies reduced unused credit card balance limits, that might be invisible by other measures. It would also distinguish between periods when a large share of net worth is illiquid, and periods when it is available to be spent.

Like the money supply, this probably should have a broad defintion (any ability to spend) and a narrow one (ability to spend less foreseen commitments that draw upon the ability to spend). But, it would still seem to me to be an enterprise worth undertaking that would provide useful economic insight.

1 comment:

Dave Barnes said...

brilliant idea