Signs of Deleveraging-post #6

It’s been well over a year since I’ve posted anything about deleveraging but this article in the NY Times over the weekend caught my eye.  Deleveraging is a phenomenon we’re seeing across the US economy where households and corporations are paying down debt in the wake of the subprime crisis.  Part of the reason for this is because lenders are not lending as aggressively anymore but as far as demand goes I’m also experiencing more and more applicants requesting shorter amortizations on their mortgages.  Clearly from a psychological perspective consumers associate risk with debt.

The article talks about how more and more refinance consumers are taking 20-year mortgages instead of the standard 30 year mortgages.

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

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.

Rate Update September 18, 2008

Rates are unchanged from yesterday’s levels which were sharply higher from the previous day.

After dropping close to 500 points in each of the past two days, the Dow Jones Industrial Average is trading in positive territory thanks to creative efforts on the part of the Fed to restore confidence in the financial system. This small rally in stocks is putting some pressure on the bond market which could push mortgage rates higher.

These are unprecedented times that we are living through.  The Wall Street Journal published a great article today in which they summarized the current “financial disease” that we are suffering from:

“Fed and Treasury officials have identified the disease. It’s called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can’t pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

Current Outlook: long-term floating, near-term locking