This is probably one of the most important questions for the economy going forward: How much deleveraging is there left? Basically everyone thinks the cycle isn’t nearly over.
Yesterday we published some research from Deutsche Bank estimating that the process would continue through at least 2011.
Comstock Funds has also published a new note on the subject. Here’s the nut:
To be conservative, let’s assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean. Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures. While this could be accomplished over a number of years, it can readily be seen that the deleveraging would create a highly significant drag on consumer outlays for an extended period. Since such spending accounts for some 70% of GDP, this creates a serious drag on the overall economy as well.
If this is true, it shows why the stimulus was always doomed to fail. The government can cancel out this trend by leveraging up to offset the shrinking consumer demand. But if it deleverages while the consumer is deleveraging, then GDP just goes back to shrinking. That part isn’t that complicated.