Deleverage post #5

Back in September 2008 I wrote this post on household deleveraging.  Although I haven’t posted on this subject in a while it is clear that the trend continues.

In this morning’s WSJ this article is featured entitled “Drought of Credit Hampers Recovery“.  In the article the authors explain that consumer debt (i.e. auto loans, credit cards, loans for recreational equipment) has fallen significantly since the collapse of the housing market and subprime crisis.

This is not a surprise as households cut back on spending and banks cut back on lending.  But the article makes it sounds like this trend is a bad thing.

I guess it’s true that a reduction in consumer spending ultimately costs jobs.  BUT, isn’t it also true that the levels of debt we saw during the boom, especially consumer debt which is “unhealthy” debt because it’s either unsecured or secured by a depreciating asset, was unsustainable?

If so, then is this really a bad thing?  Call me old-fashioned but I tend to think that this is good news.

What are your thoughts?  Has your household cut it’s debt in the last year?  Tell your story in the comment section below.

Deleverage post #4

Gary Shilling wrote this piece for on the topic of deleveraging.  I began blogging about this topic back in September because I believe virtually all households and businesses will need to look for ways to deleverage over the course of the next few years.  Furthermore, in 20 years from now I believe we’ll look back and realize that deleveraging was the most significant macro-economic theme from this point forward.

Here are some interesting points from Gary’s article:

-The combined debt and equity of U.S. financial institutions went from 10% of gross domestic product in 1973 to 118% at the end of 2007. Over the same period household debt, including mortgages, rose from 45% of GDP to 98%.

-Consumers dropped their saving rate from 12% in the early 1980s to zero 20 years later.

How can you delevrage your personal balance sheet?  Save more and spend less.  If you need help with a household budget we have services available for you.

Here are links to my previous 3 deleverage postings:

numero uno

numero dos

numero tres

Deleverage post #3

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 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.

Deleveraging begins according to Fed data

Back on September 29th I wrote this post regarding the concept of “deleveraging”.  Over the past few decades American households and corporations were addicted to debt.  We used credit cards, home equity lines of credit, mortgage loans, auto loans, etc. to accelerate our consumption.

However, our unabated use of debt lead us to where we find ourselves today.  In the midst of one of the worst financial crisis’s in our nation’s history.  As a result, the credit spicket has been turned off and consumers are being forced to deleverage their personal balance sheets.

Data supporting this trend was released today when the Federal Reserve reported that consumer borrowing declined last month for the first time in nearly 20 years.  In the long-run this is good news.

Deleveraging is the word of the year

The Economist featured this great article today about the fact that not only financial firms but businesses and individual households will be forced to deleverage over the course of the next few years.

Among the points that I found interest in:

*In the near term delveraging of banks, hedge funds, and households will likely depress asset prices lower.  This is because as people sell assets to pay-off debt (deleverage) they will increase the supply of assets in the marketplace.

*Even if the bailout plan goes through the financial industry will likely suffer for sometime making credit harder to come by.

*Thanks to the impact of devleveraging, “a shortfall of bank capital of around $170 million may reduce the potential supply of credit by $1.7 trillion.”

*”Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression.”