I blogged about the process of “deleveraging” balance sheets for US households back in September and October. Deleveraging is the process of US households reducing their debt and hopefully increasing their assets.
For the past few years US households “leveraged” themselves by borrowing money on easy credit qualification. Not only did US households engage in this process but US corporations did as well. In fact, leverage is the reason Wall Street behemoths Lehman Brothers, Bear Sterns, and Merrill Lynch all collapsed. They had borrowed money to buy assets that are now difficult to value which caused their capitalization ratio to fall below allowable levels.
Many US households face similar fates. Borrowing money to purchase investment properties, consumer goods, or other non-liquid assets is now causing problems throughout our economy.
This artcile which was publised on www.cnnmoney.com is another sign that the downturn in the economy is forcing consumers to spend less, save more, and pay down debt. Although this spells problems for US retailers it is great news for the long-term viability of our economy.