As stimulus sputters out, we’ve been talking a lot (again) about the balance sheet recession, and the fundamental problem facing the private sector: Households are still massively indebted from the boom, and leverage needs to head lower.
We’ve shown this chart of household debt to income several times.
It’s headed lower from its peak, but it remains elevated by historical standards.
Based on the latest Flow of Funds data, Justin Lahart at WSJ looks at a similar number, which is household debt vs. household assets.
Currently household debt to assets is at 18.4%, down from 21.7% two years ago, but still well above 14.4%, which is where we were in the 90s. In fact, based on this measure, we’re basically halfway from the peak, though it’s not clear at all that the 90s either a floor, or whether we need to get down that far. Lahart notes that to get there, though, would require that the average household extinguish another $26,172 worth of debt.
So there’s the problem. The leverage trend is to still go lower, and so without the government to absorb that leverage (which is what happened during the stimulus), the private sector is going to have a tough time.
For more good thoughts on the matter, see Cullen Roche’s take.
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