Click to enlarge:

Source: Bloomberg BRIEFs Economic Newspaper February 28, 2012


Why has the recovery been so weak? The short answer is Household Deleveraging. Its why post credit crisis recoveries are so much slower across the boards.

Deleveraging prevents the virtuous cycle from beginning. Less borrowing means less retail spending. That eventually bites into corporate profits, which ultimately means more modest CapEx spending and weaker hiring.

Which is pretty much what we have seen: Weak holiday retail sales, soft spending (other than Autos and Gasoline), mediocre (but improving) NFP, flat wages, mild inflation, ok GDP.

This is what a post credit crisis recovery is supposed to look like.

Category: Bailouts, Credit, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Household Deleveraging Slows Recovery”

  1. I think it would be a more accurate reflction of conditions if Household Debt as % of PI was Household debt service as a % of PI to account for the interest rate enviroment.

  2. Woof says:

    Private virtue, public vice.

  3. mark says:

    This is what a post credit crisis recovery is supposed to look like.

    Who supposes this? I assume you are referring to those who prefer a high risk of deflation to even a modest risk of inflation, i.e., lenders and the rest of the rentier class. I for one suppose that my government should be doing everything it can to boost employment and demand even if that means the rentier class has to face a higher risk of inflation than they would prefer.

  4. Westbound says:

    I would be curious to know how much of the deleveraging is due to foreclosures/mortgage writedowns. That is obviously far different from people reaching into their pockets to pay down a mortgage.

  5. NoKidding says:


    Also percentage of HI vs mortgage debt is misleading. Agregate debt includes a lot of households without mortgages. It is a somewhat bimodal distribution with a large population owing 2-4x income and another large population owing nothing (1/3 of all homes are owned outright, and more than a quarter underwater last I saw actual data).

    Distribution of mortgage balances for population would be interesting to post. Last saw it a few years ago on Calc Risk.

  6. obsvr-1 says:

    charts are illustrative of the Consumer Balance Sheet recession – which has not ended. Without the extraordinary spend form the gov’t, multi-trillion dollar deficits, and the QE from the FED the GDP would certainly be following this contraction. FED is fighting this deflation and inflation is being masked by this de-leveraging. The artificial stimulus is going into commodities and business coffers – the money has to go somewhere; certainly not to the working/middle class nor fixed income savers.

    Bummer when what you own is suffering asset value deflation and what you need is suffering inflation. Can’t see where this ends good.

  7. [...] Are consumers done deleveraging?  (Big Picture) [...]

  8. Expat says:

    “Why has the recovery been so weak?”

    The short answer is that we are not “recovering”. That would imply a fall from realistic, sustainable levels of economic activity. We were and are still in a massive bubble made of sound and fury and imaginary money signifying nothing. We wasted thirty years of real economic wealth during a ten year orgy of greed and hyperbole.

    The baseline is not 2006 or 2007. The baseline is somewhere back in the 90′s. So, either we collapse back to the baseline and then recover or we tread water for ten years waiting for reality to catch up to our IPODs and granite countertops.

  9. louis says:

    Must be strategic, damn greedy speculators.

  10. dougc says:

    According to ZH, 45% of household deleveraging is due to consumers defaulting on mortgages and credit card deebt.

  11. AHodge says:

    only partly is it “normal” and like its “supposed to…
    and while Dougc above is right about “default” or writedown resched
    writedowns can be a good cleanout thing that reduces debt service
    its actually less recessionary than lower spending delevering
    but even that part necessary
    “no” household savings near zero savings rat e was not sustainable
    but it is not normal that finance has been left half broken,
    non guaranteed securitization of all kinds still nearly shut down
    and bank lending only recently even breaking to a positive

  12. BennyProfane says:


    Couldn’t have said it better. I’m always trying to convince people that we are recovering by returning to normal home values, but, from what I have read recently, most “homeowners” are waiting for ’05 to return. Japan II.

  13. gordo365 says:

    Expat – your comments are right on!

    We don’t know what “normal” GDP is because we are and have been running on debt (private and public) in the years prior to baby boomers retiring en masse.

  14. rd says:

    Does other include student loans? I would have expected more of an increase then over the past decade.

    It is interesting that home equity lines of credit don’t seem to have changed much. I would have expected their reduction to be parallel to or faster than mortgages.

    Much of the mortgage reduction is probably foreclosures and write-offs which means people blew up their credit rating.

  15. deanscamaro says:

    Why is household deleveraging considered bad??? People got into debt they couldn’t sustain, based on home equity. They now are trying to reduce debt from past levels. The U.S. economic “guru’s” believe people should go right back to the “days of debt” that existed and spend, spend spend. This country has to get back into a “normal” GDP, which means less spending where sales are less than in the past.

  16. Frilton Miedman says:

    “The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”
    -Marriner Stoddard Eccles, Beckoning Frontiers (1951)

  17. obsvr-1 says:


    De-leveraging is not bad, it’s when the gov’t deficit spends and the FED cranks up the ‘money press’ to try to hide the deflation it becomes bad. Then the false sense of recovery suspends the de-leveraging and initiates credit expansion to start the bubble machine a blowin’. The money/power elite just can’t help themselves. And its an election year, so the multi-trillion dollar money hose is paving the way for another 4 years of Obama-nomics, could otherwise be labeled an Obama-Nation.

  18. Frilton Miedman says:

    deanscamaro Says:
    February 29th, 2012 at 3:07 pm
    “Why is household deleveraging considered bad???”

    Technically, it isn’t.

    It does symbolize another problem that the other members are discussing.

    Ten years ago, wages were 6% higher, and unemployment is now @ 8.3% atop that, while consumer debt, although falling, still @ all time highs.

    This means one thing – consumption is falling or is going to fall, which equates to slower economic activity, lower GDP and yet the market is almost back to it’s 2007 level.

    The U.S. economy is 70% consumption driven, this boils down to consumer buying power.

  19. Would it be incorrect to think of this deleveraging as just consumers paying off the previous years’ credit-fueled bubble, and, once we’re back to an acceptable level (I have no idea what that would be), consumers will lever up once again and lead us into another bubble?

  20. Theravadin says:

    Agreed with Westbound. The amount of deleveraging in Credit Card is small, and only versus the peak, HELoC almost nil, ditto the others. All that this reflects is a ton of foreclosures. As well, if you look at bankruptcy statistics, there has been a significant rise, which is probably responsible for part of the non-mortgage reduction in debt. In other words, what these statistics are showing is the effects of “involuntary” deleveraging. Take those effects out and I doubt you see much voluntary deleveraging at all.

  21. bear_in_mind says:

    The good news is that the trend is moving in the right direction. The bad news is that mortgage debt has barely budged (i.e 106 pct @ peak to 102 pct of PI now), and household debt remains ABOVE 100 percent of personal income. Ugh.

    The downward glide path of mortgage debt would need to be maintained another 5 to 6 years just to return to the high-80′s percentile seen on the left of the chart in 2002, when American households were carrying debt of just 93 pct to PI.

    With median wages continuing to slide, it’s gonna be a real tough slog to work-off that debt. I think it all points to a fundamental reshaping of American’s relationship to finances, much like that seen in the generation that lived through the Great Depression.

    If the banks were forced to clean-up and write-off the bad debts they’re holding, those numbers would drop sooner, but the likelihood of that is akin to a ‘Black Swan’ event. Those losses will eventually be absorbed, but probably after many more TARP’s, QE’s and other forms of taxpayer pinata.

  22. “…The American economy is stuck in a consumer debt trap. Consumers and businesses, not to mention local and state governments, are still in the dregs of a balance sheet recession. Without increased government spending to mitigate the demand crisis, there’s little chance the economy will jump start on its own. And while there are job-killing regulations out there, these are small potatoes compared to the demand crisis and the fallout from the housing bubble.

    Then again, Keynesian spending isn’t the only way to fix a balance sheet recession and get consumer spending to kick back in. There’s the old biblical idea of a jubilee – a national cancellation of private debts. That’s what Fred Clark suggests could be a fix to our economic ills, and it’s not a bad idea at all. He quotes this Reuters piece which spells out the value of such a program:…”


    “…Odious debt

    In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion…”

    “Take Your Pick”

  23. Ed618 says:

    Student loans not included in this?

    Didn’t they recently eclipse credit card debt in size?

  24. carleric says:

    I view reduction in consumer debt and subsequent spending decreases as a good thing. I know Bennie and the boys think if the consumer doesn’t spend we are doomed. Is some deflation in the cost of goods a bad thing? Only in the minds of central bankers. Deflation prevents or precludes them inflating their debt away. Screw ‘em. Our economy needs savings and investments not more sillyass toys. Givings bottles of whiskey to drunks just doesn’t seem like a solid economic policy to me.

  25. rootless says:


    De-leveraging is not bad, it’s when the gov’t deficit spends and the FED cranks up the ‘money press’ to try to hide the deflation it becomes bad.

    I do not see why trying to stimulate the economy through government spending, if the economy went into contraction otherwise, is something that shouldn’t be done.

    The explanation that the government does all this for some sinister motives like trying to “hide the deflation”, and not just to stimulate the economy, sounds very like paranoid conspiracy fantasy to me. Not that government spending has contributed much to GDP growth, recently.

  26. ih says:

    Problem with charts like this is that the downward trend of “deleveraging” instinctively signals to the reader – “down = bad”. Whether folks think this is good or bad for the economy is irrelevant, since unsustainable household debt levels by definition will eventually cease to sustain … as the chart data is demonstrating!
    Hip hip hooray! I personally think this is great news. One by one, I see people choosing to remove the excessive, unnecessary shackles of debt from their feet … who gives a flying f*&k about the supposed stigma of strategically defaulting? Tell the usurers to go F themselves.
    OWS should promote a National Default Day … no actual fireworks required!

  27. DeDude says:

    “Why is household deleveraging considered bad???”

    Like anything else it can be good or bad depending on the timing. If the economy is in a hole then it is bad because consumer spending is 70% of our GDP and little else can pick up until consumers spend. If the economy is roaring along it is good because you don’t want an overheated economy and consumer debt should not get so high that the consumers get bugged down with its cost (and then cannot afford to consume anything but “bank services”). Unfortunately, (and as usual) the private sector does the wrong (pro-cyclical) thing and the only counter-weight is the public sector, which can decide to make an informed choice to either go pro- or counter- cyclical. If everybody goes pro-cyclical then you have huge swings of boom-bust cycles with associated huge waste of resources and underutilization of capacity.

  28. obsvr-1 says:


    Um, when was the last time you saw these consumer debt charts displayed in the context of stimulus and QE, or any open discussion regarding the consumer balance sheet recession (as indicated in the charts, still in recession). Since 70% of GDP is from the consumer the de-leveraging has a recessionary impact on GDP. But what do we hear, GDP is growing, although modestly, it is growing. And hey, the FED trumpeted the revised Q4 ’11 up to 3%.
    Look at the difficulty the congress (and press) had in getting the FED to be audited to discover what is transpiring in the closed private meetings and processes. Kinda the definition of conspiracy, operating in private and secretive collaboration.

    The very definition of stimulus is short term, but we are now going on 4 years of stimulus to the tune of driving deficit spend over $1T per year — which is what 9-10% of GDP; yet we have a paltry 1.5 – 2.5% GDP growth; so where did all that money go ? Unconstrained stimulus is driving mal-investments and opens the door to more and more picking of winners and losers by those who have their hand on the stimulus pump.

    QE was sold as a process of recapitalizing the banks (QE1, moving trash assets to the FED Bal Sht) and QE2 increase bank reserves to get banks to increase loans; but wait remember, consumers are deleveraging; so change the message to ‘we want to make risk free investments be not attractive to increase more risky investment’. Never mind those pesky savers and fixed income folks — the retired have no ability to earn their way out of the mess, they are sitting ducks getting little to negative real return on their savings.

    Yes the alternative is ugly, acknowledging the problem, writing off the loss, report a real GDP number and let a competitive free market clear and operate. It certainly would be easier to get to a 3 – 4 % growth from a 14T than a fictitious 16T GDP.

  29. constantnormal says:

    So, when do incomes turn upward?  ’cause spending ain’t gonna until incomes do …

    One way to interpret these charts is that they are reflecting a deleveraging of an excess of debt, with no impact whatsoever to the average income. I think we can look at the labor participation and unemployment rates and see that ain’t the case here.

    Another way to look at this is that the reduction in incomes has led to a commensurate reduction in the ability to service debt, and a subsequent deleveraging of debt (with a bit of conservative overshoot) to get down to levels where people feel comfortable with their debt loads.

    So what will spark the surge in middle class incomes necessary to propell this economy forward once more? Especially considering the slide of bazillions of boomers into retirement, where they are (hopefully) unlikely to be taking on lots of debt … Also considering the utter lack of wage improvement for the middle class over the past two+ decades …

  30. rootless says:


    Um, when was the last time you saw these consumer debt charts displayed in the context of stimulus and QE, or any open discussion regarding the consumer balance sheet recession (as indicated in the charts, still in recession).

    The Federal Reserve releases those debt numbers in all detail every three months. Yeah, it’s kept very secretive.

    Since 70% of GDP is from the consumer the de-leveraging has a recessionary impact on GDP.

    GDP growth is a function of the second derivative of debt, or the first derivative of debt change. Thus, no, debt deflation doesn’t have a recessionary impact per-se. Accelerating debt deflation does. There can be GDP growth despite deleveraging consumers.

    And hey, the FED trumpeted the revised Q4 ’11 up to 3%.

    Of course, in the world of conspiracy fantasies it’s all just made up.

    The Fed doesn’t even release the GDP numbers. Those are released by the BEA of the US Department of Commerce.

    The very definition of stimulus is short term, but we are now going on 4 years of stimulus to the tune of driving deficit spend over $1T per year — which is what 9-10% of GDP; yet we have a paltry 1.5 – 2.5% GDP growth; so where did all that money go ?

    Your question where the money went and the alleged contradiction between the magnitude of the deficit and the relatively small GDP growth numbers, which you assert, operates with the false assumption that merely having a deficit should have increased GDP. Where did you get that from? Increasing government spending contributes to GDP growth, but not the deficit by itself. Most of the deficit has come from automatic stabilizers and tax receipt contraction due to the recession. It only partly counteracted the contraction which would have been even larger otherwise. Direct Keynesian stimulus by the Federal Government was rather small, about 750 G$ since February 2009 with ARRA, so about 250 G$ per year, or somewhat more than only 60 G$ per quarter on average, although it wasn’t equally distributed over the quarters. The contribution of total government expenditures and gross investments to the GDP change amounted to only 0.34% and 0.14% in 2009 and 2010, respectively. In 2011, the dG in dGDP=dC+dI+dG+dT was even minus 0.44% according to the most recent statistical release. Where is the alleged “unconstrainted stimulus” in those numbers? When government spending doesn’t increase, or when it even decreases, there can’t be a positive GDP contribution from government.

    Yes the alternative is ugly, acknowledging the problem, writing off the loss, report a real GDP number and let a competitive free market clear and operate. It certainly would be easier to get to a 3 – 4 % growth from a 14T than a fictitious 16T GDP.

    I don’t know why the current GDP numbers are supposed to be fictitious ones. It’s real consumption, production, and income for the private sector, even if a part of it credit financed. Is in your world nothing supposed to be financed using credit anymore? I’m happy that there is the possibility of loans. For instance, w/o mortgages I couldn’t have bought an apartment last summer. And why do you think it would be 14 T$ instead? It was 14 T$ in 2009.

    But sure, let the economy collapse by 10 or 20%, let the U3 unemployment rate sore to 15, 20, or 25%, and then everything will be just fine afterward. Then you could even have a GDP growth by 3 or 4%, eventually, once everything has bottomed out. These statistical numbers will probably make everyone happy then.

    BTW: Are you talking about the same “competitive free market” that led to the private credit bubble, the subprime loan mess, the real estate bubble, and the following collapse and financial crisis in the first hand, which is supposed to provide the solution?

  31. rootless says:

    I meant, of course, “soar”. Then again, “sore” would be quite fitting in such a case, too.

  32. Frilton Miedman says:

    constantnormal Says:
    February 29th, 2012 at 8:18 pm
    “So, when do incomes turn upward? ’cause spending ain’t gonna until incomes do …”


    The answer, decades, probably more -

    Do the math, using an engineer as an example.

    A Chinese engineer makes a comfortable living for $255/month.

    An American engineer – $4700/month (while paying of his tuition, that the Chinese engineer doesn’t have because higher ed is state provided, and so is his healthcare).

    Is Apple going to suddenly be compelled to hire engineers for an 1800% markup?…just to be patriotic?…because they want some of that “American exceptionalism”?


    They’d lose their shirt to every other smart phone maker/distributor .

    Sorry to break the news to all the “Atlas Shrugged” groupies, but this is a matter for government regulation as laid out in the Constitution — as the Founding Fathers put it -

    “Section 8 – Powers of Congress

    The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; ……

    …To regulate Commerce with foreign Nations, and among the several States, ….”

    For all the ridiculous ranting/raving over the Constitution, “socialism”, personal liberty and free market capitalism, I sure wish these same knucklehead politicians and conservative”think tanks”would actually read the Constitution they so anxiously ramble on about.

  33. LauraS says:

    I think that in the foreseeable future we will experience another deleveraging. Since all governments returned to the idea of cutting expenses, we are quickly coming to a period, when nobody would buy nothing. I don´t have to be an economic specialist to understand, that this is a shortcut to hell.
    In the times of crisis, everyone is saving. People, who were ten years before buying big houses, nowadays think about whether to rent or buy a house .
    And what is the government doing? It is planning to wage another war against Iran. Yes the taxpayers don´t have any other problems right now than to fight over Israel, which is continuously struggling to survive.
    Maybe it is about a time to forget about being the superpower and start thinking about how to survive in highly competitive environment of global economy. Maybe its time to think about protection of our own citizens from poverty.

  34. Greg0658 says:

    Good Thread .. word misusages and all :-)
    MEH I’d like to plant that last one under my last one (if the overusage moderator lets me)

    I’d like to invite Israel over here under our big tent .. hey its only land (really – ya Land = Big Deal)
    (but then we’d have to worry about energy in a different light – so complicated – glad I didn’t procreate a kid :-|

  35. DeDude says:


    Yes those 25% who were unemployed would be sore – even if they had the pleasure of looking at a 3-4% GDP growth rate that eventually a decade or two later would pull the unemployment rate down below 8%.