Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Myth of Debt Deleveraging Deflation

Economics / US Debt Sep 20, 2010 - 08:39 AM GMT

By: Brady_Willett


Best Financial Markets Analysis ArticleBackground: The reason the ‘net worth’ data is an important consideration today is self evident: unable to explain why the outlook for consumer spending is positive given that debt service costs are hitting record highs, savings are near record lows, and wages are failing to keep pace with inflation, optimistic economists point to the consumer’s balance sheet and calmly conclude that everything will be all right. And although these analysts have indeed been right for a long time (16-years and counting), there is ample evidence brewing to suggest that the US consumer is about to fall down.. - August 21, 2007 - Forget Peak Oil, Peak Net Worth is the Real Danger

In the third quarter of 2008 households and non profit organizations (or ‘consumers’) had $14.6 trillion in total debt on their balance sheets.  Since then the consumer has managed to reduce this number by a mere $652 billion.  By way of contrast, after reaching $79.1 trillion in the third quarter of 2007, total assets have contracted by an astonishing $12.4 trillion.

A closer look at the above chart reveals that the net worth of consumers has been close to matching its historical growth rate during the last six-quarters. Should this trend continue, sometime during the second quarter of 2013 the net worth figures will surpass their former high of $65.7 trillion. Needless to say, this type of steady increase in net worth is more sustainable than the skyrocketing/plummeting experiences of yesterday.

Also noteworthy is that in each of the last 3-quarters total assets have increased on an annualized basis while total liabilities have declined. Despite the fact that liabilities are declining primarily because of defaults (WSJ), this is one of the most significant ‘deleveraging’ trends when it comes to household balance sheets.

Despite some positive trends on the balance sheet side of things, it is not reasonable to conclude that ‘deleveraging’ has run its course. On the contrary, given that the decline in household assets has been 19-times greater than the decline in liabilities (from each lines respective ‘peak’ until 2Q10), many false positives have been produced in recent quarters. On this front, consider the following:

* Since debt peaked in 3Q08 debt/assets have increased.
* Since assets peaked in 3Q07 debt/assets have increased.
* Since net worth peaked in 2Q07 debt/assets have increased.

In other words, if you ignore the 5-quarters ending 4Q09, debt/asset readings suggest that there has been absolutely no deleveraging of household balance sheets.

To be fair, there are some statistics that support the notion that the consumer is not acting as foolishly as yesterday (see also the Fed’s estimates on debt servicing costs). A couple of charts on this idea will suffice:

Optimism aside, even though the above statistics tell us that the consumer is saving more money (as opposed to say buying internet stocks or trying to flip real estate), and that the debt servicing costs statistics are going in the right direction, it is worth remembering that a major improvement in household balance sheets has yet to materialize. In other words, consumer has a new shovel in hand, but when will they really start digging?


The U.S. consumer spent more than 2-decades amassing debt at an unsustainable pace, and along the way they embraced an erroneous faith that their investments (or yesterday’s ‘savings’) would always bail them out trouble.  Given that this ‘faith’ has been shattered, it is entirely reasonable to conclude that it will an extended period of time before the type of balance sheet leverage seen in recent memory returns (if ever).

Many economists and policy makers do not agree that a prolonged period of balance sheet deleveraging is in the works, and instead speculate that any improvement in household balance sheets is one reason to eye another consumer binge:

“Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.” Bernanke

Not only does the consumer have a long way to go before its balance sheet can be considered ‘strong’, but the very idea that deleveraging today produces consumption tomorrow is suspect.  Quite frankly, the end result to ‘deleveraging’ may simply be a more sustainable balance sheet rather than a balance sheet ready to support an increase in consumption.

On this point it is worth pointing out that even though a company like Wal-Mart had a debt/assets reading of 59% in 1971 and ended fiscal 2010 with a debt/assets reading of 58%, it still became one of the great growth/profit stories in American history. The lesson, if otherwise unclear, is that assets and liabilities can (and in some cases must) grow in a consistent and sustainable manner to achieve maximum prosperity.

With this in mind, and remembering that household balance sheets are in most respects still extremely levered compared to the historical norm, why are policy makers like Bernanke quick to speculate that a stronger balance sheet can “allow households to increase their spending”?  One word answers this question: desperation.

In short, while the means for future deleveraging of household balance sheets exists, it is a complete myth that this process is afoot.

By Brady Willett and Dr. Todd Alway was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in