MGI on Debt and Deleveraging

McKinsey Global Institute has a new report out on debt and deleveraging. Key takeaways from the executive summary are:
- Over leverage is widespread, affecting many different countries and sectors (household, states, financial insititutions, commercial real estate and to a lesser extent corporates)
- Deleveraging has barely begun
- If past episodes are any guide growth will be slow to negative for a few years as
- Past deleveraging episodes lasted 6 to 7 years on average.

The long report (not read) is a goldmine of data with a detailed look at seven past deleveraging episodes.

Deleveraging

Great little paper from the San Francisco Fed on consumer deleveraging.

Taking Japan as an example the process may take 10 years till 2018 to bring back household debt to personal income to 100%, the level of 2002, from the excessive 133% reached in 2007.

Their conclusion: "A simple model of household debt dynamics can be used to project the path of the saving rate that is needed to push the debt-to-income ratio down to 100% over the next 10 years—a Japan-style deleveraging. Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change."

MGI on Consumer Deleveraging

McKinsey Global Institute tackles the question of consumer deleveraging and asks: "Will US consumer debt reduction cripple the recovery?".

They state: "If consumers continue to reduce their debt, the effect on consumption will depend on income growth. For example, if incomes grow by 2 percent per year, households could reduce their debt-to-income ratio by five percentage points with a saving rate of just 2.3 percent. This would require $254 billion less spending per year. Without income growth, the same reduction in leverage would require more than twice as much saving, or $535 billion less consumption."

And then conclude: "But the bottom line is this: Given that the US household debt-to-income ratio rose to 27 percentage points above its long-term trend, it is easy to see how consumer deleveraging could result in hundreds of billions of dollars worth of foregone consumption in coming years."

The full report is here (free registration needed) and has tons of great charts.