U.S. consumers are becoming more frugal, paying down debt, and not taking on new loans, according to the New York Fed.
In a recent report, the Fed points out that the story behind consumers cutting their debts isn’t just about defaults or mortgages. It is about Americans repairing their balance sheets.
From The New York Fed:
While borrowing contributed an annual average of about $330 billion to consumers’ cash flow between 2000 and 2007, by 2009 consumers reduced their cash flow by $150 billion to reduce these debts. This represents a $500 billion change in cash flow in just two years.
This fits in with the thesis put forward by many, including Richard Koo of Nomura, who suggest that households will be deleveraging for sometime, with a psychological preference for low debt driving the decision making.
Now we can actually see evidence of this fact in the U.S. economy. Even though interest rates are extremely low, consumers are disinterested in new debt and are instead paying down debt and saving.
Policy makers may need to stop thinking about how to encourage people to take on more debt, and instead, how they can help consumers pay down debt faster.