The Great American Deleveraging: Fact or Myth?

The Great American Deleveraging: Fact or Myth?

Russ Koesterich, CFA - Author

May 4 2021, Updated 10:12 a.m. ET

3. There is already too much U.S. government debt.

Gross U.S. federal debt is at around 100% of GDP, a level historically associated with slower growth. And this gross debt doesn’t include unfunded liabilities related to the country’s pension and medical programs.

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4. America has too much debt in general.

Tales of the great American deleveraging aren’t completely accurate. U.S. household balance sheets certainly are in much better shape than they were pre-crisis, and the financial sector is less levered. That said, overall non-financial debt in the United States has increased from $32 trillion on the eve of the financial crisis to more than $41 trillion today. Even after adjusting for the growth in the economy, the best you can say is that U.S. debt has stabilized. The ratio of non-financial debt-to-GDP is nearly 235%. While this is down a bit from the 2009 peak of 240%, debt is still disturbingly high from a historical perspective. The 60-year average is just 160% and even as recently as 10 years ago, non-financial debt was only 200% of GDP.

Market Realist – According to the Federal Reserve Bank of New York, the aggregate household debt balances stood at $11.83 trillion as of December 31, 2014, up 1%, or $117 billion, from 3Q14. Though overall household debt is still 6.7% lower than the levels seen in 3Q08, the debt level is higher than pre-recession levels. Debt for housing purposes (IYR) (VNQ) stands at $8.68 trillion, higher than the 1Q04 level of $6.17 trillion.

The great American deleveraging has largely been limited to the financial sector (XLF) (IYF). Non-financial debt is still much higher than historical averages. The previous graph shows the non-financial debt-to-GDP ratio. According to BlackRock estimates, non-financial debt has increased by a phenomenal $9 trillion during the period of “deleveraging.” Corporate debt (LQD) (AGG) too has been climbing steadily, buoyed by the near-zero interest rates prevalent in the economy. According to estimates from Morgan Stanley, net leverage for highly rated US non-financial companies (debt less cash as a multiple of annual earnings) was 1.88 times at the end of 2014, up from 1.63 times at the end of 2007.

US federal debt has increased by $7 trillion since President Barack Obama assumed office, and it currently stands at a massive $18 trillion. Read on to the next part of the series to understand the road ahead for the US economy.


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