Jonathan Wilmott: The Overleveraged US Consumer Is A Myth

Jonathan Wilmott, chief global strategist at Credit Suisse, is guest-blogging for the day over at FT Alphaville, and has already produced a number of gems.

Here for example is some good analysis of the latest from the Bank of Japan.

In this post, he takes on the overly-accepted conventional wisdom, that the US consumer remains massively overleveraged, and has years and years of deleveraging yet to go through, before returning to health.

First he notes this well-traveled debt-to-GDP ratio, which ostensibly shows the great consumer leveraging

leverage

But the kicker is that it was mainly the poor — the bottom 20% — that really leveraged to the hilt:

leverage

If you exclude the bottom quintile, things don’t look quite so ridiculous.

Wilmott concludes:

One could usefully get a lot more granular than that, but the more interesting point is why we find it so emotionally satisfying to believe that US consumers have become irrationally and fecklessly over-borrowed when the facts don’t really live up to the caricature.

The debt story is really about the cyclical vulnerability of consumer spending, not a structural obstacle to future spending that matters even when income grows. The distinction is critical. Full recovery of consumer spending can occur with house price stabilisation and a return of income growth. It has little to do with getting the savings rate or debt-income ratio to certain levels.

Follow his full blogging at FT Alphaville all day >>

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