Monday, March 21, 2011

Households' financial burdens continue to ease


Recently released data for Q4/10 show that households' financial burdens continued to ease. Total financial obligations (auto leases, homeowners' insurance, property tax, mortgage and consumer debt), as a percent of disposable income, have fallen almost 12% from their Sep. '07 high. As the chart shows, debt and financial burdens have on balance been unchanged since 1985, after a rise in the mid-2000s. That equates to some meaningful deleveraging, and as I have pointed out before, this deleveraging occurred during a time of economic recovery. Debt is not essential for a recovery, and reducing debt is not contractionary. Debt facilitates economic activity, but it is not necessary for growth. You can't borrow your way to prosperity, but lending and financial market intermediation can make an economy more efficient. The problem with debt comes when consumers increase their borrowing in the belief that their financial and economic conditions will be unchanged or improved in the future, only to find out that the future did not turn out as expected. This is not a fatal problem, but it does throw a wrench into the economy's gears that can take some time to work out.

In short, I think the reduction in financial burdens is a healthy sign that reflects the fact that people and businesses have been actively adjusting to changing circumstances, and it is this dynamic response to adversity that sets the stage for a new cycle of growth.

9 comments:

sgt.red.blue.red said...

Yep! The equity account grows, the debt is getting paid down, and we re-fied Q4, 2010. Firing on all cylinders right now>

Benjamin said...

I just hope soon people feel comfortable with debt levels. If consumers keep paying down debts, we could see a Japan-style deflation.

House prices are still going down.

With real estate and wages falling, I am not sure we are clear yet of the deflationary woods.

Did anyone in Japan in 1991 predict "Well, we have another 20 years of asset deflation ahead?"

honestcreditguy said...

http://research.stlouisfed.org/fred2/series/CMDEBT?cid=32256

looks like plenty of debt to me...and most of the debt drop is write downs, chargeoffs and bankruptcy...

The consumer is up to their grandchildren in debt....

Debt sleeps with the devil...You are a slave when you subscribe to debt....While Ben the insane punishes savers and the prudent..

Benjamin wants more printing...Are you a banker shill

Charles said...

The issue is not the level of debt it is household net worth. Recovery would be here if household net worth reached 120% of its 2006 level - the level it was expected to reach when the economy was strong. The issue is compounded by demographics. The large cohort of people approaching retirement are deeply affected by the collapse in net worth because they are in the asset accumulation phase of their lives. The window for addressing retirement needs is short.

Add to that what has happened reductions in Social Security and public sector pensions. Recovery will be long and slow.

septizoniom said...

mr grannis's brain. right here.

Jean-Pierre Deslandes said...

I have to agree this is encouraging.

But government debt is growing and sooner or later this will attack and affect households.

Sure deleveraging is happening but maybe not as fast as we think.

Benjamin said...

Honestcreditguy:

Worse than a banker shill--I am a fan of three to four percent inflation for several years. I even go so far to say I enjoy prosperity and boom times!

To your point, I have no connection to the banking industry, other than as an ordinary customer.

Frozen in the North said...

One aspect I found troubling is the drop in credit card debt that was entirely due to write-downs (January). I wonder how much of the reduction we are seeing here is actually debt payoff, as opposed to debt pay down.

In my opinion this is an important consideration when analyzing the impact of a reduction in the borrowing levels

Frozen in the North said...

Sorry mis-typing I mean write-offs as opposed to debt pay-down