Page 43 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

to be significant. Between the summer of 2007 and the summer
of 2009, U.S. household wealth shrank by an estimated
$13.9 trillion, or 22 percent. Meanwhile, the savings rate rose to
5.9 percent in the summer of 2009, equating to a reduction in
consumer demand of $400 billion per year. Another factor driv-
ing down consumption is that, spurred by job insecurity, con-
sumers are starting to pay back their huge debts.
This is not the first time that we have witnessed deleverag-
ing in an economy. In the Great Depression, the nominal debt
of U.S. households decreased by one-third between 1929 and
1933. In 1990s Japan, the credit boom affected corporations but
not private households, causing the asset bubble to create a
higher debt burden for nonfinancial corporations. The corpora-
tions reduced their debt burden—relative to GDP—by about
30 percentage points between 1991 and 2001. In both these
severe downturns, the borrowers deleveraged significantly. This
time around, given the close correlation between credit growth
and consumer spending, it is clear that the implications for
future growth in the United States and abroad will be signifi-
cant. This holds especially true because income and demand
were stabilized only by government intervention.
How much consumer deleveraging should we expect in the
United States?
A return to the long-term average (coincidentally, the debt
level that existed in 1997 prior to the spike upward caused by
the recent property bubble) would amount to a deleveraging of
$4 trillion. This, in turn, would lead to—depending on the rate
of deleveraging—a reduction in consumer demand of up to
$1 trillion per year for several years to come. More positive
assumptions about the rate of economic growth and inflation
translate into estimates of a $2.5 trillion deleveraging, but that

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