Most Recent Stories


It’s no secret by now that I am a believer in the balance sheet recession.  This means that U.S. households are suffering from an imbalance where they are essentially trying to service bubble era debt loads with post bubble era cash flows.  The result is that spenders become savers as they focus on paying down debt rather than spending.  Some economists have argued that this perspective is “inadequate”, but I fear they are misinterpeting the dynamics of the balance sheet recession (see here for more).

Some notable economists appear to understand these dynamics quite well though.  In a recent article (which I recommend in its entirety), Stephen Roach of Yale and Morgan Stanley elaborated on just how weak this recovery has been for the U.S. consumer:

“The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.”

Although he doesn’t use the term balance sheet recession Roach does refer to this as the reason for the current malaise:

“…The reasons behind this are not hard to fathom. By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years. When both bubbles burst, over-extended US households had no choice but to cut back and rebuild their damaged balance sheets by paying down outsize debt burdens and rebuilding depleted savings.

Yet, on both counts, balance-sheet repair has only just begun. While household-sector debt was pruned to 115% of disposable personal income in early 2011 from the peak of 130% hit in 2007, it remains well in excess of the 75% average of the 1970-2000 period. And, while the personal saving rate rose to 5% of disposable income in the first half of 2011 from the rock-bottom 1.2% low hit in mid-2005, this is far short of the nearly 8% norm that prevailed during the last 30 years of the twentieth century.

With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist. The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.”

Roach’s ideas for speeding up this recovery process:

“debt forgiveness to speed up the deleveraging process; creative saving policies that restore financial security to crisis-battered Americans; and, of course, jobs and the income they generate.”

A tax cut is still the best approach here in my opinion….

Source: Project Syndicate

Comments are closed.