The things no one mentions: Debt Deleveraging

I noticed some waves last week concerning this McKinsey Global Institute report on the international debt deleveraging process. This process is important for countries that undergo credit bubbles, where traditional central bank measures can be relatively ineffective once interest rates effectively hit zero. They note that while the process is just underway, three of the major economies have seen their ratio of total debt to GDP fall. One of those economies? The United States:

The other two are South Korea and Australia, as you can see in the above graph.

One of the interesting bullet point (emphasis added):

As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt. Deleveraging in the United Kingdom and Spain is proceeding more slowly, and these countries could face many years of gradual debt reduction ahead.

Now of course they’re including all forms debt – public and private (including financial debt, something Krugman dislikes).

A few things jump out to me:

  • I know I’ve mentioned this in the past, but trying to drawing lazy comparisons between countries based solely on the numbers drives me nuts. We’re gonna be like Greece! If we don’t follow my specific policy prescriptions we’ll go the way of Spain and Italy! Yet no one compares us to Japan, or the United Kindom. If we’re just comparing numbers, why not Germany? We’ve less government debt than the European nation that is touted as the fiscally conservative model.
  • As shown in the report, our financial debt is the second smallest share of total debt – Greece is the first – and is shrinking the fastest.
  • This is also a good opportunity to showcase the cognitive disconnect of popular conservative talking heads that couldn’t go a day without cheerleading Ireland as the free-market standard in 2007 and 2008. I have to chuckle at the sudden silence come August of ’08, now that it’s clear to anyone without motivation to dissimenate what happened there. Notice that the two largest sectors of debt – far larger than any other country on that list – is nonfinancial corporate and financial instuitions. Ireland paved the way for American conservative commentary by creating a low-tax, lightly regualted business environment that led to an explosion of economic growth.

Finally, the McKinsey group estimates that the U.S. household debt ratio could return to it’s long-term trend in 2013:

This is good news, even if the process involves a lot of “negative” deleveraging – debt being taken off the books through default and foreclosures as opposed to simply paying it down.


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