Fed’s Flow of Funds tells us how much debt there is
The Q2 US balance sheet is out via the Fed’s Flow of Funds statement and it reveals that household debt (home mortgages + consumer credit) as a % of disposable income fell to 118% from 120% in Q1 and 123% at the end of ’08 and vs the record high of 127% in ’06. It was last below 100% in 2001 and was at 89% 10 years ago so while we are headed in the right direction in terms of consumer financial health, the process could be a long one. According to the data, the value of household real estate ROSE by $323.4b which is strange considering home prices have continued to decline, albeit at a slower pace. This, in addition to a $1.6t rise in stock prices, led to an almost $2t rise in net worth. For the country as a whole, debt as a % of GDP was little changed at 360% due to an increase in government borrowing at all levels and this is up from 257% 10 years ago.
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September 17th, 2009 at 12:54 pm
Apparently we are still in Bizarro World, Peter.
September 17th, 2009 at 2:33 pm
Excuse my financial ignorance, if I happen to prove to have some by proposing this question, but, does this really tell us much? Isn’t it important to factor in the cost to service the debt? To use nice clean numbers for an example, a prime+1.75% loan 10 years ago would be 10%. Today it would be half that at 5% translating to a payment that’s over a third less on a 30-year mortgage. Since most people get into debt based on the payment they can afford, not the price of the thing they’re buying, this seems perfectly reasonable (i.e. debt ratios should be higher when interest rates are lower). Debt ratios (granted – based on disposable income not total income) are a third higher than they were 10 years ago, (118%/89%), which seems to jive with payments being a third lower. I guess my question is, given that people can afford to have more debt when interest rates are lower, does this really tell us anything about our financial health (assuming that the low interest rates are sustainable, which is a whole other can of worms)? Inflation of course also plays into this, but inflation has been relatively stable for the last 10 years compared to interest rates, so interest rates still dominate the equation. Don’t we need to shift what is an “acceptable” amount of debt based on interest and inflation rates?
September 19th, 2009 at 11:46 pm
@Brendan 2:33 pm
You can also turn that logic around, and look at it from the perspective of the lender — debt markets are far larger than equity markets, and if rates are held abnormally low in order to support the debt load, that means the profits from interest will be commensurately lower, stifling growth.
I suspect that the correct perspective is a mixture of the two views.
September 20th, 2009 at 12:02 am
@Brendan — another way to look at this is to extend it — if lower rates permit more debt, do zero rates permit infinite debt?
There is an optimal balancing point between debt leverage and economic growth, one that history shows is far below the debt levels we face today. If anything, the increasingly volatile times should demand a lower debt load than the historical norms, reflecting lower leverage to properly address the increased risk from these volatile times.
September 20th, 2009 at 12:08 am
I think this shows that the domestic debt bubble has *not* been punctured, that we continue to work hard at inflating it. I suspect that when we do finally see a rupture in the domestic debt bubble, it will come from US Treasury defaults or devaluing the USD in a rapid waterfall fashion.
While our real estate bubble has definitely been punctured, our debt bubble has successfully been temporarily patched. Sadly, no one is looking for ways to lower the debt level in a graceful manner, so we can expect in the fullness of time, for the debt bubble to expire in the same manner as all bubbles do — explosively.
No telling whether that will occur next week, next year, or some number of years in the future. But as with all bubbles, the bigger they get, the louder the bang when they eventually pop.