First, in the nearly 60 years history of this data series, we have never seen households de-leverage like they are now. That tells us about how different this current situation is relative to all other times.
The above chart shows the last ten years of this data series. Since 2008, the US household sector has shed nearly $1 trillion in debt -- the total drop has been from $13.8 to about $12.9 trillion. That's 5.8% of the US' nominal GDP.
Think about this from an economic perspective. $900 billion dollars -- that could have gone to spending -- went to paying down debt (either in the form of actually paying the debt down or letting it be extinguished through legal means). Think of the multiplier that would have on the economy had it occurred -- we certainly would have had stronger growth without it.
8 comments:
Don't follow the logic of your claim about $900BB that could have gone into alternative consumption.
Household de-leveraging is not simply the application of cash to the repayment of debt. For example, household with $100 of mortgage debt defaults on the loan, effects a short sale for $80 and moves into lower priced home. $20 of de-leveraging occurred, but it did not directly consume any of the household's cash. Yes, it likely included a simultaneous loss of equity, but that is not a component of household leverage. In fact, one suspects, at least in this limited hypothetical, that the during the period of default, cash that otherwise would have gone toward servicing the debt went into consumption.
Correct me if I'm wrong but didn't most of that debt come from an over inflated housing market? Plus there was the near trillion dollars wasted on Iraq.
Likewise, the government should not spend, spend, spend. Eventually, one has to pay the piper, as Europe is learning. Obama so much wants the U.S. to be like Europe... I sure hope he doesn't get his wish.
I greatly appreciate your blog. It is the only positive blog that I have found that actually resorts to facts.
In this case, you did not point out that the majority of household deleveraging has actually been due to foreclosures. This does have a positive effect.
Also, total US debt (household, business, government, etc.) has actually gone up in nominal terms since 2008. In terms of debt/gdp, total debt as of now (June 2012) has been reduced to the levels of 2007, according to the lastest Federal Reserve Flow of Funds report.
Deleveraging is healthy, especially after the false economy during the housing boom. The acceleration of the trend is apparent the past 2-3 decades. This is a good development.
Pointing out the obvious,but the trend was unhealthy to begin with. The scary part is the flatlining so far has had devastating effects on the economy. Can't imagine how the US would look if a more severe contraction takes place.
Extinguishing debt helps consumer spending, As it eases the debt burden. I see others have mentioned it above. I suggest removing the verbiage in your column where you say this sort of household debt reduction could otherwise have gone to spending.
The "household with $100 of mortgage debt defaults on the loan, effects a short sale for $80" does not "move into lower priced home." They rent.
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