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...