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News Link • Economy - Economics USA

A Reminder Of How Much Deleveraging Households Still Have To Do

Going back over the past 6 decades (Chart 6), household debt has been forever rising as a percentage of GDP, ramping up this decade to its peak in Q1 last year at 97.3%. Through the end of Q1 this year, it has dropped to 92.8%. Undoubtedly when Q2 data is released, it will have experienced further improvement. If our rough estimate is correct that real mortgage debt is approximately $1 Trillion lower, then real Household Debt is 85% of GDP. That puts the ratio at 2004 levels just as the housing bubble started to pick up. Is there room for the ratio to drop further? Definitely considering we only used the two most serious categories of delinquency and GDP has the potential to grow. What is the correct ratio? Considering the ratio has one of the best long term uptrend’s that we have ever seen, all we can say is we know it was too high at the peak and it is probably coming down almost as quickly as it went up during most of this decade. Many will also note that much of the leverage has transferred from the private sector to the public sector. That is something we cannot deny, but what we do know is a de‐levered consumer will play a much more instrumental role in the post‐crisis recovery than the other alternative of having a less levered Government.

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