Still Not An Optimist

David Roche in the FT tomorrow:

When Volker walked into the Fed 30 years ago, the US national savings rate had been relatively static for decades at around 20 per cent of GDP and total US debt to GDP was about 160 per cent. Household debt was 47 per cent of national income. When the credit bubble burst in August 2007, the national savings ratio had fallen to 14 per cent of GDP and debt had risen to 350 per cent with household debt at just under 100 per cent of GDP. Even today, household debt in the US, although now contracting, still exceeds the level at the beginning of this crisis.

The disinflationary forces that drove the switch from thrift to leverage are over. This means the next decade will be one of replacing leverage with thrift. That will hurt retail spending.

The latest increase in the savings rate may be a positive trend in itself. But so far it has only been possible because of the Obama stimulus package. That has accounted for all the 5 per cent growth in household income so far this year. All that has happened is the consumer has saved and not spent the fiscal handouts financed by the Obama debt splurge. From now on, the impact of the stimulus measures will slowly wane and that means any rise in household savings will hit consumption directly.

This will set off feedback loops between the real economy and financial one, in the opposite direction to that we have been experiencing. It will cause consumer incomes and employment to deteriorate, along with the real economy, giving rise to increased defaults on consumer credit, commercial real estate and other loans, as well as, of course, housing mortgages. The default ratio on prime mortgages is already well above the US treasury’s stress test limit set for the banks. And the default rates on consumer debt, including credits, are rising very fast. The credit crisis hit to banks’ balance sheets is far from over.

I am still not yet on the economist optimist's bandwagon.  At the core of so much now is understanding how weak this decade was for the average consumer in America before the Great Recession kicked in.