There was an interesting report yesterday published by NDR (Ned Davis Research) highlighting the current financial position of households through 2012. The data shows how households have continued to recover from the financial crisis and in many cases are now in the best position in over a decade. Households have been paying off debt aided by low interest rates, rebounding asset prices and slowly improving incomes. The data tracked by NDR covers various household debt service and financial obligations ratios. For example, one ratio compares household credit market debt as a percentage of total household financial assets. This ratio is currently at 23.6% and is the lowest since the first quarter of 2002. By comparison, at the heart of the financial crisis in early 2009 the ratio was 32.6%. Another financial obligations ratio that includes vehicle leases, rent, insurance and property taxes is the lowest since 1981. The debt service ratio which calculates minimum debt service payments on mortgage debt and consumer credit as a percentage of disposable income was at a record low (data goes back to 1980). This last statistic is no doubt influenced by today’s extremely low interest rates and would not look as favorable if interest rates were higher.
So the private sector has been doing the “right” thing by deleveraging which in the short term reduces demand but in the long-term increases demand. This deleveraging process by the private sector is one of the reasons why the economic recovery has been less than robust.
While the private sector has been deleveraging, the government has been doing the exact opposite. Gross federal debt now stands over 103% of GDP compared to around 64% in 2008. The average maturity for U.S. debt is around 5.5 years and the average interest rate on all interest-bearing U.S. debt is 2.487% as of the end of February (source: TreasuryDirect). In an effort to support or “stimulate” the economy since the financial crisis government spending has increased to about 24% of GDP compared to the 66-year average of 19.7%. Borrowing to spend means the government is taking money out of the economy to try and put it back into the economy. In the end we are left with a bigger debt burden that will weigh on future growth.
With these low rates, we are being given a tremendous opportunity to lower rather than increase our debt burden going forward. The government should lock in these low rates by issuing more long-term Treasuries which would give us more time to set our fiscal house in order. Once these conditions were set the American economic machine could soar on a firmer foundation.