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The San Francisco Fed is out with an excellent piece on the long-term complexities of massive debt unwinds.  This is an excellent summary of the crisis and one of the pillars of my longer-term perspectives.

The primary cause of the issues we confront is a massive accumulation of household debt.  From 1960-1980 the ratio of personal income to debt rose to 65%.  Over the next two decades that ratio increased to 133%!   Household debt remains extraordinarily high today.


Clearly, much of this surge in debt was attributed to the mortgage and securitization markets.  As housing began to buckle the ripple effect through the economy & the consumer was crippling.

Unfortunately, problems this large don’t end in a month or a year.  As you can see below, Japan provides an excellent model for what we can expect from the deleveraging process moving ahead.   As the FRBSF states, this ratio needs to come back to equilibrium which is still currently far away.


Consuming this debt isn’t going to be a quick meal at the McDonald’s drive thru as we might see during a normal recession.  Rather, absorbing all of this debt will be more like a snake that eats a deer.  Expect a long drawn out process that could last much longer than expected and you can be certain that the economy will remain vulnerable throughout this process.