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More Balance Sheet Recession Drivers

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June 13, 2011 – Comments (0)

This goes along with my last post. Household debt is still very high historically. However not only do we have an *average* household debt problem, but because of the growing income gap the debt problem is mostly in the middle income range of American's (Main Street).

Either Main Street incomes will grow while they are able to deleverage ... or they won't. And there are important ramifications either way. This is why this situation bears paying attention to.

Please see these two posts by TPC for explanations: http://pragcap.com/the-long-trek-back-to-sustainable-debt-levels and http://pragcap.com/the-disparity-of-household-debt

$26,172: Amount of debt the average U.S. household would need to cut to bring balance sheets back to 1990s levels.



“…In the first quarter, households owed $13.3 trillion, an amount equal to 18.4% of total household assets, including stock portfolios, savings and homes, according to the Federal Reserve‘s flow of funds report. That was down from 21.7% two years earlier but still well above the 14.4% level that prevailed in the 1990s. That suggests household balance sheets don’t have nearly enough cushioning against financial shocks, like job loss and illness, as they should.

...

“At the current trajectory it’s not unreasonable to assume that the balance sheet recession will last well into 2012 and potentially  longer.  While a 1:1 ratio is “sustainable” by my estimates, it would be comforting to see levels closer to the historical levels in the 80% range



...

the problem of debt is increasingly concentrated on the middle class where debt/income ratios surged from 66.9% in 1983 to 156.7% in 2007!  That compares to a decline for the top 1% of 86.8% in 1983 to 39.4% in 2007.

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