The graph above is courtesy of Cullen Roche of Pragmatic Capitalism. He remarks:
The current data does not bode well for the U.S. economy. Based on this model, the U.S. economy is likely to begin officially contracting in 2012 as the balance sheet recession continues and government spending slows. The good news is that the model is not predicting a contraction that is deep like we saw in the tumultuous 70′s. The bad news is that our government does not understand that we have been in one long balance sheet recession this entire time and as private sector credit growth continues contracting (or flatlining), they will be required to offset the lack of growth via higher than normal budget deficits.
Let’s have a show of hands. Who thinks that a reversion to mean in the relationship between household liabilities and household disposable income means a return to the situation that prevailed in 2008? Is that possible, let alone desireable? Given the phlegmatic growth in employment since long before the start of the Great Recession, who thinks that return would mean that unemployment would be restored to the levels of 2005? Employment?
Interesting topic and problem. I think my response here should be the same as the same inquiry re: housing.
Is there any reason the laws of physics, or mathematics, say we must revert to the mean? No. Must we revert to long term trend? Probably a stronger argument there. But what is trend? The most excellent Drew eyeball regression calculator could construct two different trend lines on that graphic, one at 1.15, and one at, eeewww. Ugly.
No one should be surprised that an LBO guy would take a debt to cash flow or debt to net worth approach. Those would be the predicates for liabilities not reverting to the mean. Debt capacity generally expands. Let’s hope.
But given very problematic equity and housing market dynamics……….I have go out on a limb with a very definitive………I dunno.
Sure makes one curious about all of the factors that caused the bump beginning around 2002/2003. All I got is:
Lower interest rates following the early oughts recession encouraging mortgage debt.
Is there anything else? If things haven’t changed (interest rates now lower), other than marginal debtors have been kicked out of mortgage eligibility, then its no wonder consumer balance sheets have only corrected by about 1/3rd.
Reminds me of all the arguments I had with folks in the 2003 area about rising inequality and debt increasing. Not to worry they said. Household wealth is growing because their homes are appreciating. (Just FTR, would interesting to see the denominator and numerator listed, ie, is this predominantly (now) due to income effects.
Query- What happens to this trend line, and our economy, if we start saving at Chinese rates?
Steve
steve, I don’t know the answer, but in the comments to the link Cullen Roche models the effect of a balanced budget on the economy.