Monday, December 12, 2011

US debt deleveraging at slow pace but it is happening

The deleveraging of the US economy is occurring but the pace is slow. We have seen total debt to GDP hit a four year low to 340% versus a high in the first quarter of 2009 of 373%. Household debt has moved from a peak of 135% at the end of 2007 to 119% currently.

Much of this debt ratio has fallen because there has been retrenching by everyone during the post 2008 fall-out. There have been defaults which cut the debt levels. This has been a significant but negative development. Those who have jobs are cutting back, but more needs to be done. The issues is that it is not clear what the right level of debt to GDP is necessary or appropriate for the US economy to grow at trend. Additionally, when there are negative rates of interest, there actually is little incentive to pay-down debt. The price of money is cheap.

We are below trend and have not closed the output gap. If spending is not undertaken by debt, then there has to be an increase in real wages and productivity to get us back to trend. As predicted by most economists, when dealing with a balance sheet recession, the revival of an economy is a slow road.

No comments: