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."