Tuesday, February 15, 2011

Deleveraging Accelerates Slightly in Q4

This is good news. Yesterday, the New York Fed came out with their third quarterly report on household debt and credit. (I discussed the first one here, and the second here). Anyway, the good news is that the pace of deleveraging increased (at least by my preferred metric).

The most important graph from the quarterly report itself is this one:

Because that is in nominal dollars, I convert 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.

I like to use the debt-to-DPI measure because it normalizes the debt to people's capacity to service it: their income.  This ratio also summarizes all the ways debt can erode: people can pay it off (and not replace it with new balances), they can renegotiate or default on it, or they can just allow it to inflate away over time.

Anyway, to get a clearer sense of the rate of change, here is the prior four-quarter change in the debt-to-DPI ratio:

Last time, it looked like there were some tentative signs of stabilization at a rate of about 5 or 6 percentage points per year of deleveraging.  However this data point came in at 7.1% of improvement from Q4 2009 to Q4 2010 - so perhaps the pace is continuing to accelerate.  Anyway, combined with otherwise positive signs of stabilization in the US economy in 2010, that seems like good news - we made slightly better progress on getting rid of the mound of debt we ran up in the late 90s and 2000s.

The other graph of particular interest in the report was this one:

This shows the total number of US credit accounts of various kinds.  You can see that the credit card line looks like it might have hit some kind of turning point.  After sliding every quarter for two years or so, in Q4 2010, it actually increased slightly.


Burk said...

Hi, Stuart-

One might note that insofar as private deleveraging is a good thing, the national accounting identities say that growth of the federal deficit is also a good thing. They are mirror images of each other.

The money have to come from somewhere, and that is from government spending and deficit, given our deficit position relative to trade and foreign saving as well. See the St. Louis Fed national economic trends, p15 top graph.

So I think we can not emphasize too much that the deficit is a good thing, and will be for a long time. Whether we want to match it with selling debt is another matter- no real need to do that, actually.

Anonymous said...

Has society as a whole deleveraged on per cap basis? (including sovereign and corporate debt).

Anonymous said...

Has deleveraging occurred on a per capita basis when all debt is included (+ corporate, sovereign (all levels))?

Anonymous said...

Is deleveraging still occurring on a per capita basis with all forms of debt considered ( inc. corporate, sovereign at all levels)

Stuart Staniford said...


I don't think this is true of defaults though, right? That simply destroys some private assets and some private debt while having no effect on the public balance.

We saw last time that the nominal deleveraging is dominated by default. Then when divided out by DPI, it gets a substantial assist from the fact that DPI is growing.

Kenneth D. Worth said...

Well, to a large extent, I think this is largely involuntary. People who can pay their mortgage are paying off principal. They can't take more money out even if they wanted to. The banks want greater than 20% equity and good credit and income for a cash-out refi these days, and few people have it.

Meanwhile, the foreclosures continue and banruptcy filings are at very high levels.

But it is hard to talk about deleveraging when overall debt levels continue to rise. Its just Uncle Sam doing the borrowing for us, taking over the debts we previously owed to the banks (i.e. the bailouts) and keeping taxes artifially low relative to the services provided.

So, it would seem to me to be an illusion of deleveraging rather than the real thing.

And BTW, the US continues to run current account deficits in the half a trillion dollar a year range. Plus ca change ...

Burk said...

Hi, Stuart-

Yes, I agree we are talking about somewhat different things. You concentrate on consumer debt and mortgages, whose reduction reflects unemployment and other factors that are also, perhaps indirectly reflected in rising government debt. But I was talking about the gross net savings position of the private economy, dominated by government bonds.

It is amazing and very disheartening that foreclosures and bankrupcies continue at such a torrid pace. That doesn't sound good at all, whether one wants to call it deleveraging or catastrophe.

Kamil said...

Well, as I see the situation from Europe. USA has a huge debt http://www.usdebtclock.org/. Private banks (corporations) will stop lending money to the government sooner or later, because it can't pay money back. The government can either cut on expenses, that would lead to lack of services and extreme deflation. Or the government asks FED to print money, that would lead to extreme (hyper) inflation.
For now it seems the dollar is loosing its reserve curency status in the world.
I personally expect the event of big inflation/deflation in years 2011 or 2012.