Monday, December 29, 2008

No household debt crisis

As readers of this blog know, I'm a fan of keeping things in perspective. With everyone obsessed by the current debt crisis, deleveraging, and collapsing demand, I've noted that there is no shortage of money out there; that there is more money and bank lending today than ever before; and that the big deleveraging play has likely maxed out. Although big money players were undoubtedly over-leveraged, this chart shows that households on average did not take on excessive levels of debt or financial obligations in recent years. (The most recent datapoint is the end of September '08.)

Household debt and financial burdens (measured by using monthly payments as a percent of disposable income) today are about the same as they were in 2002, before the financial system began devouring mountains of subprime mortgage-backed securities, and before speculators pigged out on commodities, gold, and foreign currencies.

What this means is that once the financial system finishes writing down the value that has been lost to plunging housing values and collapsing commodity prices, we will discover that the basic economy (the consumer) is still in reasonably good shape.


Prospero said...

Good chart, it is very helpful to have evidence that things may not be as dire as generally thought. What would be really cool is if the data was available to exclude the top 5% in income from this chart. In other words, exclude those that may skew the analysis, and/or limit it to those to who don't have economic flexibility to manage even marginal changes to income or debt loads. I don't have any idea whether the insight would be different though.

Scott Grannis said...

I don't know if the data exists to answer your question. I do know that the top 5% of income earners make about 35% of all income, and that that their income has risen a bit faster than all other incomes in the past few decades. So excluding them would likely produce a different picture. But would it show that debt burdens were increasing or decreasing instead of being relatively flat? That would depend on the rich's share of monthly financial payments.

Slingblade9119 said...

How much of the debt payment is actually reducing the debt vs paying interest? If a significant number of Americans are only paying the minimu monthly amount on their credit cards (which i suspect to be the case) then this chart is a but misleading - your thoughts?

Scott Grannis said...

Good question. According to the Fed, "Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt." And consumer debt service payments are only 6.2% out of the total 20% shown on the chart. So the Fed is not assuming that consumers are paying down debt by any significant degree, and to the extent they are, then the chart may be overstating debt burdens.

Steve said...

So despite generational lows in interest rates, consumer debt service is still higher than in 1980, when mortgage rates were 15%.

Its been said by others, and I'll repeat ... "its a solvency problem, not a liquidity problem." With asset prices (equities and houses) falling, the balance sheet of consumers has gotten significantly worse.

The logical responses to this:

1. Use excess cash to either save or to pay off debt, thus shoring up ones balance sheet.

2. Walk away from assets whose debt is worth more than their value.

3. Walk away from unsecured debts.

All 3 of these are occurring and, absent a magical turn around in asset prices, will continue to occur.

Oh, and if you happen to lose your job, it will become a liquidity problem as well. Happy New Year!

mrdon said...

I became intrigued with a similar chart a year or so ago. The chart shows payments as a percentage of disposable income. It does not illustrate the extent to which household debt has increased as a percentage of household income. From 1947 to about 1980 that number increased by less than one percent per year. From 1980 to about 2000 that number increased to something a little less than two percent. Since 2000, households have ANNUALLY increased their borrowing by over five percent each year. Put simply, household borrowing has increased from a pre-1980 level where households were spending less than one percent more than they earned each year to the current (or at least through last year) where they are spending in excess of five percent more than they earned.

Slingblade9119 said...

I know the exact chart you are referring to and I am of the same opinion that it more accurately reflects the effects of debt financed consumerism that in destroying the wealth of too many households. I beleive that there is in fact a houshold debt crisis.