The following note from Northern Trust helps put the balance sheet recession into perspective.   A recovery that is driven by the private sector and largely self sustaining is unlikely to occur before we see continued de-leveraging:

“The reduction in total private sector debt (businesses and households) is also significant and compares closely with the situation after the 1990-91 recession (see Chart 3).  Private sector debt as a percent of GDP peaked in the first quarter of 2009 (177.8%), with the second quarter reading at 167.9%.  A similar reduction in the 1990s was spread over nearly four years.  This sharp decline in consumer and business sector spending has resulted in the elevated jobless rate.  These numbers are being tracked closely for an early confirmation of improving conditions.  It is not a mere coincidence that economic growth gathered steam only after private sector credit growth was visible following the 1990-91 recession.”

Source: Northern Trust


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Brian

    The question becomes, do we act like prior recessions and de-leverage for a couple of years and then start piling on more debt? Or is it “different” this time and we see a change in the long-term trend of ever increasing debt levels?

  • Stephanie

    Wonder what that chart would look like if it dated back to 1929.

    And, in the words of TPC, now back to our regularly scheduled China crash…

  • DanH

    China -3% overnight.

  • Brandon Ferro

    Consumers appear to be done deleveragimg. Actually, it seems quite clear they haven’t even begun (and thus won’t) per that WSJ article awhile back – all debt reductiion has been through forced mortgage Had there been any change in behavior it would have happened by now if ever.

    Instead, I think we are in the process of relevering – check out how strong non revolving credit growth has been and auto sales, which are starting to rip.

    This is ultimately why all the comparisons to Japan are so bunk – completely different propensity to consume today using future income through debt accumulation…

    All of this is bullish for US equities I would think

  • boatman

    it doesn’t take off til housing does……years… n cars are not houses.

    bump along til something else upsets the apple cart…many possibles.

  • TPC

    Need a housing recovery for consumer credit to take off in a meaningful way. It’s 75% of all consumer debt. With a double dip on the horizon and weak housing data into H1 2011 I think it’s premature to argue that consumer credit is about to take off. We might start seeing marginally improvement, but it will remain sluggish at best.

  • B Ferro

    I agree – my comments really reflect what is so true about many of your recent Euro-zone posts – the window of opportunity to change behavior, both of consumers and of gov’ts, in a meaninful way, is entirely gone now. A crisis lost as they say. So, in the context of the balance sheet recession post here, I remain aghast that so little de-leveraging has taken place. And because it hasn’t yet, through what has been the worst crisis in 80 years, I have little optimism that it will any time soon. The credit data evinces this – non revolving credit is starting to climb nicely…