The central fact about our economy today is the huge mountain of debt Americans households accumulated over the last three decades, but especially in the last ten years. What goes up must come down, and thus we have entered what A. Gary Shilling calls The Age Of Deleveraging. The first graph shows the debt mountain and where we stand in our descent.
Climbers will tell you that going up the mountain is the easy part. It's going back down where things get dicey. From Calculated Risk based on data from the New York Fed
Household debt was "only" $4.6 trillion in 1999:Q1 but had risen to $12.5 trillion by the third quarter of 2008. Since we attained the mountain's peak, Americans have been able to shave off $900 billion off the debt pile, which tells us we have a long, long way to go. You can easily see in the graph that the rate of debt accumulation is higher than the rate of debt shedding. There is no getting around this—we will not have a "normal" economy based on savings and investment for a very long time, all other things being equal (which they are not).
Based on some new data, the New York Fed says that household deleveraging is not all due to default.
Additionally, this quarter’s supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.
Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. These unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.
So-called "consumers" had paid off $150 billion in debt by the end of 2009, but had piled it up at a rate of $300 annually between 2000 and 2007. Again we must emphasize that it will take a very long time to pay down enough debt to get to the point where households feel comfortable about spending again. If you throw the world's largest party, you must also expect the world's longest hangover.
Gary Shilling (video below) believes our descent down the debt mountain portends a long period of deflation in coming years, but I'm not so sure, especially with the Fed cranking up the money printer again. You can read about his views in John Mauldin's excellent book review The Age of Deleveraging.
On the inflation versus deflation question, I believe it wise to avoid strong predictions either way at this point, but one thing we know for sure is that lower and middle income Americans are tapped out. Keynesian strategies which encourage another spending spree should be relegated to the dustbin of history, unless somebody is planning the Stimulus to End All Stimulus—World War III.
Tech Ticker's Aaron Task and Henry Blodget interviewed Gary Shilling earlier this week. I think you'll find the video below informative, although you may not care for the final parts where they talk about good investment strategies you can apply during a deflationary Armageddon. And with that caveat...
While your analysis has meaning, it might also be important to consider the debt per capita which would probably make the debt decrease seem even more dramatic.
Posted by: Hwortheun | 11/22/2010 at 01:36 PM