More on Household Debt

Continuing on in a discussion about household debt that was going on in comments, consider this report from BlackRock Investments:

As mentioned, there is a wide dispersion of opinion on where the US consumer stands in its deleveraging process, and as we illustrated on the previous page, the wide discrepancy in views often results from imperfect data. This fact necessitates that broad assumptions sometimes need to be made, and proxy measures utilized, which attempt to “back into” the respective roles of intentional deleveraging versus credit events (such as defaults) in this process. Further, data and analysis of this kind will almost always be highly subject to idiosyncratic interpretation. Two examples that illustrate the divergence are, a recent Federal Reserve Board of New York study that found that the majority of deleveraging has been the result of intentional debt repayment and reduced demand for revolving credit lines. And a report by Moody’s Analytics, in contrast, which found that the overwhelming majority of consumer deleveraging was precipitated by defaults and charge-offs.

The Moody’s report referred to is “Consumer Credit and the Great Recovery” by Cristian Deritis. I have been unable to find it online. That’s what I’m seeing. See also this from Wells Fargo Securities:

One might wonder if the improvement in indebtedness is attributable to defaults or to consumers actively paying down their debts. Unfortunately, the evidence is mixed. A recent Federal Reserve Board of New York study found that the majority of deleveraging has been the result of intentional debt repayment and reduced demand for revolving lines of credit. However, a recent report by Moody’s Analytics found that the overwhelming majority of consumer deleveraging was precipitated by defaults and charge-offs. The wide discrepancy in opinion results from imperfect data, which necessitates broad assumptions and proxy measures that back into the respective roles of intentional deleveraging versus credit events such as defaults. Although quantifying the exact role played by each category of deleveraging proves difficult, we are certain that credit events have played a prominent role in the consumer deleveraging process in the past two years. This makes intuitive sense considering the dramatic rise in home foreclosures, credit card chargeoffs and credit defaults observed since 2007, all of which have occurred against a backdrop of persistently high unemployment.

The emphasis is mine.

How much household debt is too much? The analogy I would make is to the expression “the straw that broke the camel’s back”. I don’t think that the expression suggests that the single straw was too heavy or the camel’s back too weak. It suggests a camel-loading problem . To whatever extent household debt is a major source of our problems, as the graph above suggests, it’s a problem we’ve had for some time and is going away even more slowly. For it to be resolved behaviors will need to change and that is currently very slow to happen.

Combine those, the too-slow decline of the ratio between household income and household debt illustrated in the graph above, and that cost of debt service relative to household income has already returned to its level of the mid-1990s (suggesting that the decline of household debt other than by foreclosure or default is likely to decrease if anything) are the reasons that I’m dissatisfied with the deleveraging process.