First, Liabilities as a percent of Household wealth has been falling like a rock. From an all time high in 2009, they gone back to 2001 levels. This dramatic decline in household debt HAS to be recessonary. The amount of money in the system will fall and the demand for goods will fall.
Second, a measure of the cash-flow ability to pay debts has also fallen. If you take total household liabilities divided by disposable income, you can get a quick and dirty view of the consumer's ability to pay debt. Again this measure has fallen significantly as consumer's paid down debt. But this measure has fallen far less than the first. Clearly asset prices are rising much faster than incomes.
With the consumer rebalancing their assets and liabilities, the economy has suffered greatly. When will this end? When will the balance sheets be rebalanced?
First, demographics are a factor. With the baby boomers hitting retirement, the demand for debt must fall. The 70 year old has a much different 'desired' balance sheet than a 50 year old. To get to that 'desired' balance sheet requires liquidating debt (or not taking on debt as assets and income grow).
Second, the next generation has high eduction debt. This high debt must be repaid and will be a huge drag on the economy for the next few years. Most eduction debt has a relative short repayment period- 5 years vs a mortgage debt of 30 years.
Third, even with the decline in debt usage, debt is high compared to the 1980s. The consumer balance sheet still has huge amounts of debt and especially when you look at income to service the debt. As a result it is hard to predict when the rebalancing of the consumer portfolio will be finished.
Conclusion: We have been in a slow growth mire for several years and unless incomes rise the amount of debt will continue to constrain the economy.
