Wednesday, May 20, 2009
Just replace "US" with "UK" throughout
Mish: Effect of Household Deleveraging on Housing, Consumption and the Stock Market
U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage more than doubled, reaching an all-time high of 133% in 2007 [UK=173%]. In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. To achieve a sustainable level of debt relative to income, households need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased. Can it get worse? Yes, unfortunately it can. Expect a Japanese-style "Lost Decade" when it comes to housing and the stock market. It's payback for the greatest credit binge in world history.
8 Comments
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1. Old_traveller said...
Interesting article, but there is nowhere to be seen a consideration for QE policies and their possible effect to inflate our way out of debt. Shame.
2. mark wadsworth said...
Sure, there has to be deleveraging (which is happening apace in the corporate world with debt-for-equity swaps, bankruptcies and share issues, which are all variations on the same theme).
The problem is there are two extremes to 'deleveraging' in the household sector:
1) Bankruptcies and debt-for-equity swaps (which in practice means the bank repossessing your house - instead of holding a debt they hold the equity in your house). Individuals can't do share issues of course. This is the hard-core free market approach.
2) Money printing and massive inflation and/or slashing interest rates, which shares out the pain between borrowers and savers. This is the favoured option of politicians, because savers can't really defend themselves and the losses are not so visible; and also because the UK is a one-party state - run by the Home-owner's Party (copyright DBC Reed).
We are having a mish-mash of both of course, but it's clear that the Red Wing of the HOP that is currently in charge favours Method 2) and there is no reason to assume that the Blue Wing of the HOP is much different.
3. bellwether said...
The inflationists (who appear to be the majority at present) are perhaps a little too impressed by what govts can do here. Inflation on a global scale which is what we are talking about is more than printing money it is also about production and a belief in exchange.
Not only does the money have to be produced to fill the hole created by the implosion in income, property, commodity and stock values but the filler has to trigger activity and exchange to stop unemployment rising and wages atrophying.
For all the printing even the first part has not happened yet as globally the price of everything is far lower than it was a year ago and after the recent green shoots rally, which all turns on the consumer, probably lower still.
Everyone is making less money than they were a year ago and what they are making is cirulating far less until there are signs this will change inflation will not happen.
There is a lot of credible opinion saying that the inflationary policies will work, to both avert deflation
4. bellwether said...
the final line shouldn't be there, although I am cautious on all this bcos there is a lot of credible opinion saying that inflation is a sure thing. My problem is that I've yet to hear a convincing explanation of how it would happen on a global scale ie how do you get the additional money into peoples pockets and how do you then make them spend it.
5. Old_traveller said...
Beellwether @4: I guess one of the answers is that we may indeed have inflation but only when comsumers have that money and are willing to spend it, i.e. after the recession is over or almost over, hence we would have flation only once we do not need it at all.
6. stillthinking said...
Deleveraging is going to be very tricky though, Mish also doesn't go into how exactly this happens. There was a necessary condition for the US and the UK to allow debt levels so high, and that was the domestic savings of China, Japan etc.
So from that, it is reasonable to assume that the necessary condition for saving/deleveraging will be high levels of consumption in those countries. This is kind of a crucial point.
This isn't happening. Japanese wages are going down and their instinct to save (already high) is in fever mode, while China move to increased consumption could take years, or fail due to basically a saving mentality.
So, while the conditions to run up debt did exist, the conditions to run down debt do not. Debt trap. So collectively we can service our debts, but we can't run them down, and this is the situation now. The debts are being moved sideways onto government but -not- being paid down. I posted a while ago, that we do not choose how to repay our debts, our -creditors- do, and if we don't make stuff they want we can't pay anything off.
Bad end scenario, how is this. UK government takes on responsibility for the debt and goes on until all tax revenue goes on servicing costs, meanwhile wages in the UK collapse in real terms until manufacturing labour costs are equivalent and competitive to the Chinese.
7. stillthinking said...
In fact, this is just rephrasing what a terrible thing a debt deflationary spiral is, because paradoxically attempts to deleverage worsen your debts, which you can see in houses now, and shortly we will see in the stock market as the same calamity occurs to the leveraged buy outs of recent years, when they discover they can't refinance.
Can the government stem the losses? Maybe there is a little debt capacity left. I don't have a mortgage, neither do many on this site, but I am sitting firm and it would appear everybody else is too. The debtors squeeeeze.
8. inbreda said...
@4 bellwether
convincing explanation? Why do you need a convincing explanation? What makes you think they will try to get it in peoples pockets? Why do you think they care whether it is spent or not? It's a transfer of wealth, not a serious effort to make the world a better place!