Today the Fed released data for Q1/11 that 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 13% from their Sep. '07 high. As the chart above shows, debt and financial burdens have on balance been unchanged since 1985, after a rise in the mid-2000s.
The upshot of all this is that there has been some meaningful deleveraging going on in recent years. 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 necessarily contractionary. Debt can facilitate economic activity, but it is not necessary for growth. The problem with debt comes when consumers and/or businesses increase their borrowing in the belief that their financial health 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.
The ongoing 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. I would note in that regard that the last time we saw significant household deleveraging was in the 1990-95 period; over the subsequent five years, the economy grew by more than 4% a year.
UPDATE: To answer several readers' concerns, I believe the data for this chart include student loans, since they are included in the Fed's Consumer Credit release.
The ongoing 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. I would note in that regard that the last time we saw significant household deleveraging was in the 1990-95 period; over the subsequent five years, the economy grew by more than 4% a year.
UPDATE: To answer several readers' concerns, I believe the data for this chart include student loans, since they are included in the Fed's Consumer Credit release.
Isn't this "debt reduction" largely due to the tidal wave of foreclosures thus shifting the burden of mortgage payments, insurance, and real estate taxes from households onto the banks? I would think a large percentage of that deleveraging would be due to this phenomenon. That, and the fact that those that are foreclosed on are able to live rent free for several yrs before being evicted.
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ReplyDeleteWe are slowly getting out of the woods. Jeez, I wish the Fed was more aggressive is pursuing economic growth.
ReplyDeleteAnd I wish Obama would seize an historic opportunity to make the D-Party into a pro-business party, and alter regs and taxes that hurt business. I think the time is ripe.
Just as I wished Bush had seized opportunities to reform the military to current needs (and make it vastly less expensive).
I wish for a lot of things.
Undoubtedly, foreclosures have played a role in the deleveraging process. The financial markets, however, long ago figured out the level of foreclosures, and marked down MBS accordingly. Thus, the losses have been absorbed, for the most part, by the system already. Defaults are a zero-sum game: one party wins, the other loses. The banks and institutional investors who hold most of the mortgages have suffered tremendously already, and in the process households are regaining their financial health.
ReplyDelete"The banks and institutional investors who hold most of the mortgages have suffered tremendously already"
ReplyDeleteOh dear.
Are you capturing the rise in debt to fund private education? This space is possibly entering a bubble supported by government policies...
ReplyDeleteFrom David Beckworth's blog:
ReplyDeleteSo did Milton Friedman actually recommend doing successive rounds of quantitative easing until nominal spending returns to normal levels? Let's have Milton Friedman speak for himself. Here is an excerpt from a Q&A following a 2000 speech he delivered at the Bank of Canada (my bold below).
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”
It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.
Scott, FAS 157 is still not in place and the banks haven't marked to market so I doubt they have suffered tremendously. Most of the debt reduction has been thru bankruptcy and foreclosure...
ReplyDeleteextend and pretend...economic viagra is alive and well..barely noticeable here
http://research.stlouisfed.org/fred2/series/TOTALSL
Scott,
ReplyDeleteWondering if these numbers for household debt include student loans outstanding?
Thx
j: I believe student loans are not included. According to the Fed: "Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt."
ReplyDeleteI am sorry, however, I find this chart difficult to believe...
ReplyDeleteWhat is meant by disposable? Does this mean income after the mob takes its cut of ones labor?
Either way, if a consumer has $5000.oo in monthly income, according to this chart they are spending a grand total of $600.oo on both their bank rent and consumer debt?
Something does not jive !
OT, M1 in Germany looking pretty ugly.
ReplyDeletehttp://www.bundesbank.de/statistik/statistik_zeitreihen.en.php?first=1&open=&func=row&tr=TVS301J&showGraph=1
Hans: This chart reflects averages for all households. Disposable income is income after taxes. If the average disposable income for a family is 5000/mo., then the chart says that the average family is paying about $600/mo for its mortage and consumer (e.g., credit card) debt. Many families of course have no mortgage debt, so many pay much more than that.
ReplyDeleteAt this point in the global debt game, it is probably better to look at total consumer debt including education etc.
ReplyDeleteMost of the new lending in the past few years was almost entirely on education. When these people graduate in a year or two without good job prospects, the $100K in loans will seem like an albatross around their necks and the economy.
Thank you, Professor Grannis! Although this index does not produce large movements, it certainly was suggesting America had entered the fog, when the index read 17.55 its highest ever in 2007, Q3 just months before the Bushession...
ReplyDeleteBill Gross out with an article suggesting student loan debt around $1T.
ReplyDeleteThat will certainly have a big impact on your chart...
Scott, Are you getting this data from the FRB?
ReplyDeleteRe: data source. All my charts indicate the source of their data. The Fed is the source for this chart.
ReplyDeleteRe: student loans. According to the Fed's Consumer Credit Release, I believe student loans are included in the data shown in the chart.
ReplyDeletehttp://www.federalreserve.gov/releases/g19/current/g19.htm