The NY Fed released their quarterly report on household debt and credit and the report is a bit of a mixed bag. In short, household debt (figure 1) remains just shy of its peak back in 2008. But as the financial obligations ratio (figure 2) has come down household debt has become more affordable. A raw way of visualizing what has happened to the American household over the last 30 years is to look at the disposable income to liabilities data (figure 3). As you can see we’ve maintained an ever increasing debt burden. The trajectory is obviously not sustainable and has actually reversed marginally in recent quarters.
What this essentially means is that households are going to remain hesitant to take on more debt, although the pressures to pay down debt have been alleviated. In essence, the U.S. government has succeeded in stopping the negative ramifications of the debt avalanche, but the result is likely to be stagnant growth and a hesitancy to take on more debt. It’s also important to note that 74% if this debt is still tied to mortgages so households are likely to remain extremely sensitive to changes in home prices.
What does this mean? It means the household balance sheet remains strained and is likely to remain strained for years to come. By kicking the can down the road we have almost ensured that future growth will be below trend and that the risks of more frequent recessions increases as exogenous risks have a greater influence on the U.S. economy.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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