ashutosh_73 wrote:
Is it implicit in THIS part of the stimulus that, Rich folks, in reality, didn't owe the most of the household debt?
Hi ashutosh_73,
The rest of your analysis is fine, but the argument in the stimulus directly states that affluent people must have owned most of the household debt. Here's how we can look at this question:
P1: "Household indebtedness, which some theorists regard as causing recession, was high preceding the recent recession, but so was the value of assets owned by households."
Here the author says that (a) {household debt} causes recession (according to some theorists) and (b) {household debt} was actually high before the recent recession.
Then it seems that the author thinks {high household asset value} is a counterbalance to {high household debt}. We know this because the author says "
but so was the value of assets owned by households".
P2: "Admittedly, if most of the assets were owned by quite affluent households, and most of the debt was owed by low-income households, high household debt levels could have been the cause of the recession despite high asset values: low-income households might have decreased spending in order to pay off debts while the quite affluent ones might simply have failed to increase spending."
The author thinks that if {high household debt} and {high household asset value} are
split across different types of households (
quite affluent | asset / low-income | debt), then {high household debt} could have been the reason for the recession. This is because the author says that low-income households would have to reduce spending in order to pay off the {household debt}. Quite affluent households could maintain existing spending levels even with greater {household debt}.
P3: "But, in fact, quite affluent people must have owed most of the household debt, since money is not lent to those without assets."
The author comes to the (intermediate) conclusion that
there is no such split. So the first category is
quite affluent | asset | debt. That is, the assets and the debt are both (mostly) held by affluent people (the ones who can hold such debt without reducing spending), because money is not lent to those without assets.
In other words,
{household debt} would not have led to a reduction in spending by (a) low-income households, because they would not have any debt and (b) by quite affluent households, because they can maintain existing spending levels.
Conclusion: "Therefore, the real cause must lie elsewhere."
The author concludes that {high household debt} cannot the reason for the recent recession.
TL;DR: The author thinks (a) Y can cause a recession, but (b) because {X can counterbalance Y, and affluent people had both X and Y}, {Y did not cause the recent recession}.
This is a weaken question, so we want to show that {high household debt} could have caused or did cause the recent recession. There are many, many problems in the author's argument, so prephrasing the answer is risky. It's better to move directly to the options.
Bunuel wrote:
(A) Prior to the recent recession, middle-income households owed enough debt that they had begun to decrease spending.
A. There is a lot that's wrong with the author's argument, but even if we assume that low-income households don't have any assets and that they didn't reduce spending, we can see that the author assumes that there are only two groups (affluent people and low-income households). Option A tells us that there is a third group (middle-income households), and {household debt} did in fact lead to a decrease in spending by this group.
Bunuel wrote:
(B) The total value of the economy’s household debt is exceeded by the total value of assets held by households.
B. In the absence of any other information, this is a (weak) strengthener. For example, if overall household assets (entire economy) < overall household debt (entire economy), we could expect some decrease in spending to pay off debts.
In this question though, the author just says that both are high, so perhaps small differences don't matter. We also don't know who holds the debt: the people who don't need to reduce spending, or the ones who do. No matter how we look at it, this option doesn't weaken the argument (it's either irrelevant or a weak strengthener).
Bunuel wrote:
(C) Low-income households somewhat decreased their spending during the recent recession.
C. This option is a (weak) weakener, because it tells us that low-income households did decrease their spending. However, it is weak because (a) we aren't too worried about small decreases in spending ("somewhat decreased") and (b) this option doesn't link the decrease in spending to {household debt}.
For example, we can't really weaken the argument simply by saying that spending went down. That's what normally happens in a recession. What we need to do is show that {household debt} led to something that caused the recent recession. Option A does that, and therefore it's better than option C.
Bunuel wrote:
(D) During a recession the affluent usually borrow money only in order to purchase assets.
D. Option D is either irrelevant or, at best, a (weak) strengthener. If a group that holds both the debt and the assets uses the debt only to purchase assets, there would be less pressure on that group to pay off the debt (think about how interest rates on secured debt are usually much lower than interest rates on unsecured debt).
Bunuel wrote:
(E) Household debt is the category of debt least likely to affect the economy.
E. This option strengthens the conclusion that {household debt} did not cause the recent recession.
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