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Us and Them

Household Sector Deleveraging vs. Public Sector Leveraging

September 21, 2012

At present, there's growing pressure on the public sector to begin its deleveraging process, either because we fall off the "fiscal cliff" at year-end or our politicians step up to the plate and begin the process on their own.
-Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co., Inc.

 

Key Points

  • Households have been in deleveraging mode steadily since 2008.
  • The Fed has stepped in to ease deleveraging's pressures on economy, but its zero-interest-rate policy has hurt savers.
  • Public-sector deleveraging is up next, while the total process will take a very long time.

In October 2008 I wrote a report, in the wake of the fall of Lehman Brothers, titled "A Transformational Era of Deleveraging." It happened to be one of the most widely read reports I've written, and in today's report I want to revisit the topic-specifically how far we've come within the US household sector.


The global credit crunch that was brewing before Lehman imploded kicked into high gear with the fall of that institution in mid-September of 2008. It began with the household sector, upon which a massive era of deleveraging was forced. Since then the Federal Reserve has stepped in with three rounds of quantitative easing (QE) to stem the natural tide of deflation that's historically accompanied nearly every global debt crisis.


At present, there's growing pressure on the public sector to begin its deleveraging process, either because we fall off the "fiscal cliff" at year-end or our politicians step up to the plate and begin the process on their own. So what we face is a standoff between monetary and fiscal policy-makers that are attempting to inflate . with a private sector that's in the process of deflating.


To put numbers to the battle, at the peak in the debt bubble there was $42 trillion in private-sector debt and $14 trillion in public-sector debt. The private sector is deleveraging as fast as it can while the public sector is inflating. History shows that the private sector typically wins the deflation-inflation battle, and that's why the Fed has been as aggressive as it ever has historically.

 

Read the Full Report