Yesterday, the New York Fed came out with their second quarterly report on household debt and credit. I discussed the first one here. The executive summary of this post today is:
- Deleveraging is continuing at roughly the same pace as before
- The bulk of deleveraging is occurring due to default and charge-offs, but there is a small amount of it occurring via actually paying down the debt.
Because that is nominal dollars, I did the same thing as last time and converted the debt to a percentage of disposable personal income (from the BEA):
The blue line is the data, and the red line is an eyeball extrapolation. Of course, I'm not saying things will continue in a straight line - it's just an illustration that the general pace currently would, if continued, have us deleveraged back to reasonable levels sometime towards the end of the decade.
To look at the same data another way, here is the prior four-quarter change in the debt-to-DPI ratio:
You can see that there are some tentative signs of stabilization at a rate of about 5 or 6 percentage points per year of deleveraging.
This graph illustrates my fundamental quarrel with Krugmanism. Look at what happened after the 2000 recession: people almost got to the point of starting to deleverage a bit during the recession and the jobless recovery following, but then as soon as the recovery started to take hold, they began leveraging up even higher again. In my view, American consumers are only deleveraging now because they have experienced, and are experiencing on an ongoing basis, economic pain. If the pain were to have been alleviated by massive government stimulus, the deleveraging would stop.
The fed quarterly report also contains a supplement that begins to address the question of whether all the deleveraging is happening via charge-offs and default, or some of it by actually repaying debt faster than new debt is taken out. There are two graphs. The first one shows the change in non-mortgage debt level after removing charge-offs:
As you can see, people have stopped accumulating new debt, and just started to slightly reach a net pay-off position in 2009, of perhaps $15 billion or so. I estimate from the overall debt balance graph that the total reduction in non-mortgage debt was about $120 billion in 2009 (give or take $10-$20b). So this suggests that something like 80-85% of non-mortgage deleveraging is occurring via charge-offs.
For the mortgage debts, the graph is this one:
Here the blue line represents the amount of new mortgage balance that occurs because of people selling houses and buying new ones (not via default processes). The red line represents the net change in mortgage balance because of foreclosures, short-sales, etc. The green line represents change in mortgage balance because of people just making their payments, thus reducing the principal, as well as change in balance of home equity lines.
So roughly, if we compare the green line and the red line, we can see that about twice as much principal reduction was occurring via charge-offs as via net pay-down of debt (again in 2009). Thus, as with the non-mortgage debt, mortgage deleveraging is mainly occurring via default, although with a slightly higher fraction of actual repayment occurring.
Of course, even though most deleveraging is occurring via default, it is quite significant that consumers, in some cases at the insistence of their lenders, have at least started to repay on a net basis, rather than continuing to increase their debt balances.