Where Is America In The Deleveraging Cycle?

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From Deutsche Bank, some interesting numbers on one of the most crucial questions.Market participants have recently fretted over debt levels in the United States, especially in light of the S&P downgrade of US sovereign debt. While the debt ceiling crisis and subsequent loss of AAA rating have highlighted the massive rise in government debt since the recession began in December 2007, total domestic US debt as a percentage of GDP has actually declined since peaking in Q1 2009 at 367%. In fact, domestic debt as a percentage of nominal GDP is now near pre-crisis levelsand there have been some meaningful changes within the main sectors of US debt that could have important implications for the economy.

Two of the most significant changes have occurred in the household and financial sectors, which have obviously had devastating effects on both the housing market and consumer spending. Household debt as a percentage of nominal GDP peaked at 99.5% in Q1 2009 and in absolute dollar terms, household debt peaked in Q1 2008 at $13.9 trillion. Since then, debt outstanding in this sector has declined approximately 4.4% and now stands at the lowest level since Q2 2005 (89%), which is actually near its 10-year average. The deleveraging in the financial sector has been even more severe as the recent downturn has seen debt reduced by nearly $3 trillion and now stands at 95% of GDP—the lowest level since Q1 2003. In short, the deleveraging process for households and financial institutions has been severe. However, the fact that household debt as a percentage of GDP is now near the 10-year average and financial sector debt is back to 2003 levels, gives us modest confidence that the worst of the deleveraging process, at least within these two economically important sectors, may be behind us.

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