Back in 2008 when it entered our vocabulary, The Economist called deleveraging “a fate worse than debt.” The process of reducing leverage — borrowed money — from personal, corporate and governmental finances is expected to take several years, if not a decade, to get back to a more sustainable level.
But progress doesn’t happen at the same pace for all participants in the economy. Individuals have thus far done a better job of reversing the trend of living on the funds of others. In the following two charts from J.P. Morgan’s quarterly Guide to Markets, you can see that personal savings is more than double what it was at its worst in early 2006. In the second chart, you can see that the percentage of personal income used to service debt payments (mortgages, car loans, credit cards, etc.) is near 30-year lows.
Source: Bureau of Economic Analysis, Federal Reserve, J.P. Morgan Asset Management. Data reflect most recently available as of 12/31/11.
According to this blog post from iShares, using Bloomberg information, since early 2008, U.S. households have eliminated close to $800 billion in debt.
Corporate and government deleveraging has not made the same progress.
While many corporations are operating with the best mix of cash on hand vs. debt that they have ever had, many companies are also strategically taking on more debt, even if they have a stockpile of cash. With interest rates on borrowing being so low, companies are offering bonds with miniscule yields. They figure that they can put the money to use in the operation of their business and earn a much greater return on that capital than it costs them to pay income to the bond holders.
Because of this, the iShares blog indicates that since 2008, corporations have added approximately $500 billion in debt to their balance sheets.
“This half-trillion increase, however, pales in comparison to the debt binge of the federal government. Publically traded or net federal debt has risen by more than $5 trillion since late 2007. As you can see in the chart below, this puts overall U.S. non-financial debt at a bit under $38 trillion (for the purists, this arguably understates the total by $5 trillion as it ignores government debt held by the Social Security Trust Fund).”
Source: The Great Deleveraging Myth http://isharesblog.com/blog/2012/01/16/the-great-deleveraging-myth
Of course, this is just the U.S. picture. Given the similar problems Europe, deleveraging will remain prominent in the vocabulary of economists and market analysts for a very long time.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA
Greece, land of the gods and debt
With all the attention over the past year on Greece and its debt, it’s interesting that a Greek Goddess is now being used to explain a potential outcome for the European economy.
Blackrock, in its 2012 Outlook, described its worst case scenario for this year as follows:
“If the European debt crisis were to spin out of control, it would likely plunge Europe into a deep recession that would spread to the rest of the world, including China. The result would not be a simple addition of problems, but a multiplication. It could be bad because the developed world has used up much of its firepower to fight another credit crunch and deep recession.
We call this scenario Nemesis, after the Greek goddess who wreaks havoc and vengeance on the prideful. Some would argue creating a European Monetary Union without a fiscal union was an act of hubris with punishment long overdue.”
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA