Monday, January 23, 2012

Is America Really De-Leveraging?

Reeeaaally?  I've been noticing a lot of reports in the media - especially Wall Street cheerleader telecasts like CNBC and Bloomberg - that make the claim that America and Americans are de-leveraging.  This particular spinmeister claim really bugs me because it's so easy to fact-check.

But it's not just the media.  Zerohedge featured a report published by the consulting firm, McKinsey & Company, which makes the case that Americans are reducing their debt load.  Those who went to top business schools know McKinsey as being the most sought after place to go if you want to work in a big, bureaucratic consulting firm.  In this case the well-groomed MBA's who work for McKinsey have either intentionally misled their readers or can't do proper due diligence.

Let's take a look at the numbers - and therefore the truth.  To do this all you have to do is go to the St. Louis Fed website.  It has been obvious to me for over three years since the credit crisis blossomed and the housing bubble popped that on a combined Government + private sector basis, the U.S. has not de-leveraged.  When I fact-checked the numbers, however, I was a bit surprised that the overall debt load in this country has actually increased since 2008.  This, despite the billions that have been completely written off to zero by banks and credit card companies and bankruptcy courts.

But to look at McKinsey's claim, I checked the St. Louis Fed website and went to the "Debt Outstanding by Sector" link.  There I find "Household Credit Market Debt Outstanding."  This will include all debt extended to households, not just mortgage debt.  On Jan 1, 2008 this number was $13.891 trillion LINK.  As of July 1, 2011, the latest monthly number available, the amount outstanding was $13.21 trillion.  So yes, there has been a slight reduction in household debt.  But a significant portion of this slight debt reduction comes from banks transferring that household debt to the Fed and the Treasury.  I can't readily quantify that number but I would bet good money that if you added that debt back the truth is that households really haven't de-leveraged but shifted the burden to future household generations.

The other main area of debt I like to look at, and this does not include total corporate debt, is financial sector debt.  I like to look at this because, yes, the financial sector has reduced its debt load over the last three years.  The debt load per the St. Louis Fed for the financial sector declined from $16.4 trillion in '08 to its current $13.7 trillion LINK.   HOWEVER, everyone needs to keep in mind that a big portion of the amount reduced was transferred directly from the banks to the Treasury, courtesy of Obama and Tim Geithner (yes, Bush would have done the same thing and so would have McCain, et al).   Please do not overlook this fact.  In fact, it can probably be shown that a meaningful percentage of that debt transferred to the Government was debt related to Households.  Therefore, it's not clear that the Household sector reduced its debt at all - it was just shifted to the Government.  Rearranging the deck chairs on the Titanic does not change the outcome.

Finally, there's the Government.  Over the same 3-year period, which transitioned Bush to Obama, the Government debt increased from $9.4 trillion to $14.8 trillion  LINK.   And right now we know it's around $15.3 trillion.  FURTHERMORE, you have to include the roughly $7 trillion in Fannie Mae and Freddie Mac debt assumed by Obama/Geithner AND the GMAC debt these two idiots took on.  I don't have a number handy the GMAC debt so I'll leave it out.  THEREFORE, the total amount of direct Government debt outstanding is over $22 trillion (FNM/FRE debt is not included in the Financial Sector numbers, in case you were wondering).  Again, my analysis does not include the nonfinancial corporate debt, which has increased quite a bit over the last three years:  LINK

So, good people at McKinsey, where's the de-leveraging you are talking about?  The numbers  clearly show that, not only is our country NOT de-leveraging, the amount of total debt outstanding in the economy/system as a whole is starting to accelerate at an accelerating rate.  I don't know about anyone else, but I find these numbers horrifying.  The only thing more horrifying is that fact that these highly paid, well-trained dweebs at McKinsey do such crappy work.  Then again, studies have shown that monkeys can become well-trained too...


  1. There won't be any de-leveraging either, until---

    (1) The big banks write off and/or foreclose their worthless toxic shit mortgages


    (2) An economic crash

    Don't hold your breath waiting on # 1.

  2. Dear Dave, I think you will find that the entire decrease in consumer household debt you list above is from the loans being written off or partially written down......Jerry in Pa.

  3. system would crumble in a major deleveraging...only way is to print base reserves...if i'm on the same page Dave, the fed/usg has simply taken the debt (credit) off various balance sheets and onto their own...and they just have this crap sitting on their balance sheets...but at some point, they will either need to write-down or print and make good on their promises on a nominal basis...

    and since they won't deleverage on a major scale, printing is inevitable...

    so economic growth is gone, unemployment is rising and no matter what govt/fed/business as a whole do, things get worse...

  4. If everything is fixed, nothing matters...every one that should have been a major loser ie all the overleveraged players were saved and enriched..

    The Ron Paul FIX is in: a SGT micro-doc

  5. Really good information but there is one point I don't understand. The Fannie\Freddie debt. Is it fair to add this to the overall debt load? For one, it must have been simply reclassified from the private\corporate column to the public column. So that wouldn't be an increase so much as a transfer of debt from one to the other - correct? Secondly, this debt - while certainly toxic - has SOME value. Say the assets backing that debt are worth 50% (and I think it is arguable that those houses are worth well north of 50%), wouldn't it be fair to say that the increase of debt to the public side of the ledger is only $3.5 trillion?

    I completely agree with your overall point. But unless I'm not understanding this right, throwing in $7 trillion of new debt onto the pile is a little bit misleading.

  6. I don't include corporate non-financial debt in my analysis. i'm pretty sure the financial sector debt does not include FNM/FRE debt and the Govt debt load for sure does not. Either way, the overall debt load of the economy has grown and it can be argued that the household debt load has not really shrunk.

    And I didn't introduce the idea of collateral value in terms of what FNM/FRE debt is actually worth. That's a whole other topic. My guess is that, barring laws preventing it, the Chinese will eventually swoop into this country and soak up most of the housing assets for a lot less than where they're valued now.

  7. Don't you think a lot of the problems with pe have more to do with the disassociation of acquiring the debt and when it fails the assets of the partnership that created the debt have no linkage to its repayment when extraction techniques like div recaps is how they make the bulk of their profits?

    David Stockman on Mitt, Newt and Crony Capitalism

    Former Ronald Reagan OMB director David Stockman joined us on The Dylan Ratigan Show today to explain explicitly why both Mitt Romney and Newt Gingrich are incredible offenders and beneficiaries of corporate communism or, as he likes to call it, “crony capitalism.”

  8. The personal debt burden is shifting. Some are paying down / defaulting. Others are loading up.

    Students are going from litte/no debt to a mountain of non-dischargeable debt. For a country that would like to have a peaceful populace, loading the young demographic with special and big debt is a bad recipe. At some point they will figure out why they are debt slaves, and they might do something about it.