Tell a lie often enough and people start to believe it. For
several years, media headlines have been filled with references
to a "deleveraging," or a reduction in the level of U.S.
The narrative goes as follows: The U.S. was driven into
recession by a housing bubble, fueled by excess debt. But over
the past six years, the economy has been slowly but steadily
reducing the debt burden. And like all myths, there is a kernel
of truth. The U.S.
has indeed made significant strides in reducing leverage and U.S.
banks are better capitalized.
But as for the broader economy, the unpleasant fact is there
has been no deleveraging,
I've mentioned before
. In fact, as revealed most recently in the latest revised
gross domestic product figures (
, we've generally seen quite the opposite. Consider the following
U.S. household debt remains high.
Thanks to a significant write-off in mortgage debt, U.S.
modestly reduced their debt burden
. Still, by most measures, household debt levels are still too
high. The past several years have witnessed a huge surge in
student and auto loans. And overall, U.S. household debt still
stands at 103% of disposable income. While this percentage is
down from its peak in 2007, it's worth putting the number in
perspective. Prior to 2002, household debt as a percentage of
disposable income had never even climbed above 100%.
Fueled by cheap credit, corporations have been adding
Since the third quarter of 2010, corporate debt has increased
every quarter. Over the past six quarters, corporate debt has
been growing at an average annualized rate of around 9.5%, well
above the pre-crisis average of 7.5%.
Federal government debt has exploded.
Outside of debt held by the Social Security Trust Fund, federal
debt has risen by roughly $7.3 trillion over the past six
years, an increase of 140%.
The net result is that during the period of so-called
"deleveraging," non-financial debt has increased by roughly $9
trillion. Even after normalizing for GDP, non-financial debt has
actually risen significantly since the financial crisis. Six
years ago, non-financial debt was around 227% of GDP. Today, it's
at a record 250%, as the figure below shows.
Source Bloomberg 8/4/14
This leaves the question: Does rising non-financial debt
matter for the economy and for investors? The short answer is
yes, although probably not in the short term.
However, over the longer term, a high and growing debt burden
has several implications for the U.S. economy: slower growth, a
persistent headwind for consumers and vulnerability to even a
modest rise in interest rates (this is particularly true for the
federal government, where an improving fiscal picture has been
flattered by artificially low rates).
In fact, the rising U.S. debt burden is one of the reasons why
I continue to advise
caution toward consumer sectors as well as why I
have more modest expectations for long-term U.S. stock
At a time when U.S. households
and still struggling with slow wage growth, it would have been
better had the country experienced a real deleveraging, rather
than a cosmetic one.
Sources: Bloomberg, BlackRock Research
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts