30 January 2012
The Great Deleveraging Myth
There’s been a lot of commentary lately about whether or not developed economies are deleveraging, i.e. winding down their debt.
Some recent posts, under headlines such as “The Age of Consumer Deleveraging is Over” and “Deleveraging is so 2011,” have argued that at least in the United States, consumer deleveraging appears to be a thing of the past.
My take, however, is that in many sectors of the US economy, deleveraging hasn’t happened at all. In fact, the notion that the United States is deleveraging is mostly a myth.
Now to be fair, deleveraging has occurred in at least one sector of the economy: The US financial sector, which has significantly reduced its debt. But once you move outside of the financial sector to the real economy — households, corporations and government — the great deleveraging idea evaporates.
The dirty little secret is that US non-financial debt rose by more than $5 trillion from the end of 2007 through the third-quarter of 2011. In the last year alone, the real economy has added roughly $1.4 trillion in debt to the overall US non-financial total.
It’s true that US household debt has contracted in recent years, but the contraction has been modest and is mostly due to bank write-offs. Since a debt peak in early 2008, US households have shed roughly $800 billion in debt. And as pointed out by the blog posts cited above, new US consumer credit numbers show increasing consumer debt.
At the same time, corporate debt has been rising as companies take advantage of record low yields. 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 US 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).
In short, it’s hard to argue that the US economy has deleveraged. Since 2009 the US debt burden has been relatively stable when compared to GDP. Essentially, nominal private sector debt has stabilized, while public sector debt has skyrocketed in an attempt to ease a collapse in consumption.
As I’ve mentioned before, this can continue for a while longer. In a world in which investors are short of safe investments, most are still willing to give the benefit of the doubt to the US government and lend long for the privilege of a safe place to park their money.
But for those who believe that debt levels are still unsustainably high — as I do — there does eventually need to be a reckoning. When this eventually happens, lending to the government for 2% may no longer seem like a safe haven.
Chart Source:
Bloomberg
In Hong Kong, this material is prepared by BlackRock Asset Management North Asia Limited for informational or educational purposes only and has not been reviewed by the Securities and Futures Commission. In Singapore, this material is prepared by BlackRock (Singapore) Limited (co. registration no. 200010143N) for informational or educational purposes only. This does not constitute an offer or solicitation to purchase or sell in any securities or iShares funds, nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
There are risks associated with investing, including loss of principal. Past performance is not indicative of future performance and is no guide to future returns. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. This material contains general information only and is not intended to represent general or specific investment advice. The information does not take into account your financial circumstances. An assessment should be made as to whether the information is appropriate for you having regard to your objectives, financial situation and needs.
This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. References to specific company names are for the purpose of illustrating the investment process and strategy and do not constitute investment recommendation or advice. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Any opinions contained herein reflect our judgment as of January 30, 2012 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. No part of this material may be reproduced, stored in retrieval system or transmitted in any form or by any means, electronic, mechanical, recording or distributed without the prior written consent of BlackRock.
iShares® is a registered mark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners.
© 2012 BlackRock Inc. All rights reserved.
