Monday, August 10, 2009

Get Ready for 19 Years of On/Off Deflation If History Rhymes

We keep hearing how US households are paying off their debts. The important question is - how much debt is left to be paid off?

For some insights into how much painful deleveraging may be left - I'd like to share what Bill Bonner wrote in today's Daily Reckoning (an excellent free email newsletter by the way):


Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let's see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.

Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it's twice that amount - $52 trillion, of which $38 trillion is private...or more than two and-a- half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings - in interest and principal payments.

If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years - or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero - so that is not now a source of debt reduction.

Between write-offs and pay-downs, about $2 trillion has already been cut - over, very roughly, the last 2 years. At least the math is easy.

At that rate, it will take 19 years.

Now, let's go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty...19 years. From 1990 to 2009.


For more on deflationary possibilities, here's a case study we did last week on debt deflation.

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