The Constrained Sectors: I:Households—Portfolio Reaction to Interest and Price Changes

So far, the discussion of household portfolio preferences has been based on the assumption that interest rates and prices are stable. Only the basic structure of these preferences has been considered. Household total asset accumulations are the final product of a series of choices between consumption and saving. These choices are determined, in part at least, by the relative current price of consumption and the prospective constant-price value of the income and other utility streams associated with asset ownership. Consequently, current and prospective rates and other returns on assets, and the current and prospective costs of consumption (that is, the prices of commodities and services—the consequence of the rate of inflation), are important determinants of the distribution of current receipts between net asset acquisition (saving) and consumption. While household assets are concentrated in financial assets and housing, the acquisition of such assets implicitly involves a refusal to acquire alternative physical assets (such as land), or closely related assets (such as equities), with the foregoing of the prospective earnings on such assets. A change in the ratios of prospective income from the ownership of land, equities, etc., relative to the prospective income on other assets will shift the portfolio preferences and, consequently, household portfolio structures. Similarly, while convenience assets dominate many household asset structures, any shifts in the relations between the current and prospective earnings on these and on alternative assets will strengthen or weaken the strong preferences of households for convenience.