The main reason the economy imploded in 2008 is that U.S. consumers finally collapsed under the weight of an unsustainable debt load that they had been building up for three decades.
U.S. consumers drive about 70% of the spending in the U.S. economy, so when they maxed out, the economy tanked.
When consumer spending tanked, meanwhile, corporations cut their own spending (translation: fired people), went into the fetal position, and just tried to survive.
That one-two punch flattened the economy.
Because the root cause of the problem was excessive consumer debt, there was no way the economy was going to recover until that debt–or at least the burden of that debt–was reduced.
Well, the good news is that consumers have spent the last 5 years reducing the burden of that debt.
Specifically, consumers have been defaulting, restructuring, refinancing, and/or paying down loans.
This “deleveraging” is a painful process–not just for the consumers themselves (it’s easier to accumulate debt than reduce it)–but for the businesses that depend on them.
And, to be sure, many U.S. consumers still have more debt to reduce.
But after 5 painful years, the debt burden of the average U.S. consumer is now in line with (or even below) its long-term trend. And that means that consumers can now devote a greater percentage of their income (and new borrowings) to spending again.
Morgan Stanley economist Vincent Reinhart has put together an excellent presentation explaining why he thinks the U.S. economy is nearing an “inflection point,” in which growth will finally accelerate. The presentation includes many compelling charts, so check it out here.
The chart below is the most important one.
After 5 years of pain, U.S. consumer debt service–the per cent of disposable income that households must use to pay interest on their debts–has now fallen back to normal levels:
So, now, on average, U.S. consumers can start borrowing and spending more again.
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