What De-Leveraging?

June 11, 2009 – 1:35 pm

by Rolfe Winkler, CFA

So much for de-leveraging.

The Fed published its latest Flow of Funds report today.  One key takeaway: While total debt is growing more slowly, it is still growing.  Since Q3 ’08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand.

(Click chart for larger image in new window)

By the way, the Fed only includes publicly held debt when calculating total federal government borrowings, $6.7 trillion at the end of Q1.  This excludes over $4 trillion owed to the Social Security “trust fund.”  More importantly, it excludes $60 trillion of unfunded future liabilities for Medicare and Social Security.  (see the debt clock to the right)

The second chart puts the data into perspective.  As a percentage of GDP, debt continues to expand, from 368% at the end of Q4 to 375% at the end of Q1.

(Click chart for larger image in new window)

It’s been said that the income statement is the past, but the balance sheet is the future.  Our balance sheet is getting worse.  Those who see “green shoots” believe the crisis is abating.  But they don’t understand its origin: a credit bubble that, in the aggregate, continues to inflate. The equity value of our economy is going down—think the stock market and housing equity (see below).  At the same time our debt is going up.  In other words, America’s leverage continues to expand.

The only way to climb out of a debt-induced depression is to pay down debt or to write it off.  Levering up only delays the inevitable.

Unfortunately Americans, and lately the Obama administration, have shown absolutely no political will to do this.  Republicans decry growing deficits, but do you ever hear them enumerate cuts they would make?  Clearly our plan is to keep borrowing until our lenders cut us off.

Speaking of crashing equity…

(Click chart for larger image in new window)

The last chart plots the amount of equity Americans have in their homes.  This figure has been crashing as house prices fall while mortgage debt stays roughly constant.  At the end of 2007 the figure was 49%, at the end of last year 43%.  It now stands at 41.4%.

And as CR notes: “approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less than 41.4% equity.”

  1. 16 Responses to “What De-Leveraging?”

  2. Ralfe,

    We debated this on NC a week or so ago. How do we reconcile your analysis with that os Brad Setser referred to by Krugman in the following….




    By Jamie on Jun 11, 2009

  3. I now see the answer to my question. Setser is referring to borrowing (as the movement in debt) and you are referring to the debt level.

    So when economists talk of deleveraging in the current environment they can only be referring to private sector deleveraging.

    By Jamie on Jun 11, 2009

  4. It’s worth noting that the 2009 data is for Q1 only. There’s a lot more government debt to be added during 2009, taking the final 2009 bar still higher.

    By James on Jun 11, 2009

  5. Why does the total number not equal the total of all the categories?

    By Chad on Jun 11, 2009

  6. A ha! Now the plan is clear. Today Iceland, tomorrow America!

    By Zamfir - Master of the Pan Flute on Jun 12, 2009

  7. Eventually the U.S. Gov’t will go the way of California. And it is not as far away as you may think.

    By Gregman2 on Jun 12, 2009

  8. That is why once the credit bubble blows the only thing left will be the printing press. It will be a race to the bottom in all major currencies.

    By inflation on Jun 12, 2009

  9. So if my math is OK the equity of the remaining mortgage holders (dropping the 30% that have no debt) is 15%. Since some debt holders are in late stages of pay off this is almost unbelievable. Do you have the debt profile available in “tranches” i.e. how do the over all mortgages of the entire country look? This is more grim than I thought.

    By L.Querin on Jun 12, 2009

  10. Historically great nations last an average of 300 years, with the exception of the holy roman empire. I saddens me to come to the conclusion that our country will not last 300 years. Printing worthless paper collateralized by the people in this nation is not going to fool people forever. We must make the public aware and take the next step toward our revolution which is eminent as it was in 1900’s Russia.

    By Sharon Schatz on Jun 13, 2009

  11. I found this video on YouTube which really opened my eyes to the importance of getting out of debt: http://www.youtube.com/watch?v=50bWUrKAbwU
    I am sure you will be as amazed as I was.

    By Chris on Jun 20, 2009

  1. 6 Trackback(s)

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