Reports from the Economic Front

a blog by Marty Hart-Landsberg

The Continuing Debt Burden

Savings rates are on the rise—job losses combined with wealth destruction (from collapsing housing and stock prices) have forced people to reduce spending and boost savings.  Savings as a percent of disposable income has risen from below 0% to the 5-6% range.  In fact the 5.7% savings rate in April was the highest in 14 years.

Some commentators argue that with savings rates now close to historical norms (of 6-7%) we should soon see renewed spending, providing another boost to recovery.  But this makes little sense—in this environment, people cannot maintain higher savings rates and increase spending at the same time.

An even more telling argument against a revival of spending is the continuing heavy household debt load.  The chart below (which comes from Business Week),  shows household liabilities (mortgage and consumer debt) as a percent of aftertax income.  Recent spending cutbacks have indeed produced a decline in the debt ratio—from 138.6% in the fourth quarter of 2007 to 131.1% in the first quarter of this year.  But as the chart makes clear, this process has a long way to go.

thumb_14housingdeleveraging4.gif

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: