Thursday, November 8, 2012

America's Deleveraging Still a Long Way to Go

No kidding.
Keynes' Paradox of thrift be damned ,everybody who can is still trying to get out of the pool.
From the Economist:
MY COLLEAGUE rightly notes that the next four years have the potential to be better than the last four years. The bleeding stopped long ago. Job growth continues to outpace population growth, albeit ever so slightly. Houses, which are the most important component of most Americans’ net worth, have stopped losing value; some areas have even seen price increases. Everyone believes—for better and for worse—that the financial sector will never again be allowed to endure another crisis. In the long run, this could prove ruinous, as we argued in a leader on the anniversary of Black Monday, but this belief should serve as a tailwind for the next few years. The question is whether the economy will be able to accelerate from its current pace of roughly 2% growth each year in real terms in the absence of other dramatic changes. There are good reasons for scepticism.

The biggest problem is that the private sector remains overburdened with debt. While there is no magic ratio above which crises become inevitable and below which an economy is guaranteed decades of sustainable growth, it seems plain that, contrary to more optimistic accounts, the deleveraging process still has a long way to go:

The decline so far has only been good enough to wipe out the observed increase in debt/income ratios that occurred when incomes fell during the recession, once you subtract out the contraction in the shadow banking system. The non-financial private sector is still just as leveraged as in the middle of 2006:

By comparison, consider what happened during the Great Depression:

(For those interested in making a similar chart, the underlying data can be found here and here, but they cost money, which is why I defer to Mr Keen's already extant work....MORE, including the payoff.
HT: Abnormal Returns

You don't need a lot of economic understanding to comprehend the urge of individuals to escape debt servitude. For example, November 2's "Ah--OOO-gah! Dive-Dive-Dive: Chesapeake and First Solar Tank, Oil, Gold Not looking so Good Either (CHK; FSLR)":
First Solar down 8.2% at $22.72, Chesapeake down 6.23% at $18.82 and WTI down 1.5% at $88.22.
Oh and gold.
Down 32 bucks -1.88%.

There might be a bit more deleveraging to come....
If I can figure it out pretty much anyone should be able to.

Here are a couple folks much smarter than I:
Irving Fisher, Deleveraging and the Lessons for Europe of 1873
Bridgewater's Ray Dalio on Beautiful Deleveraging
It was the deleveraging problem that kept us skeptical through 2008. If interested use the search blog box keyword Yikes! deleveraging.