Looking back to their sample of 32 past instances with post-financial crisis recoveries, MGI zeroed in on Finland and Sweden’s experiences in the 1990s as the most relevant to our current moment. Those examples “show two distinct phases of deleveraging. In the first, households, corporations, and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises. In the second phase, growth rebounds and government debt is reduced gradually over many years.”
Most economies, the authors say, are barely even in phase one. In the United Kingdom and Spain, for example, total debt is still rising. But not in the United States. Here, “debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. U.S. households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.”
It’s not been pretty, of course. Two-thirds of that deleveraging has come from defaults on home loans and consumer debt. And it’s not done, either. But if trends continue, we’ll reach the pre-bubble level of household-debt-to-disposable income by 2013. By comparison, the UK is on track to reach pre-bubble levels of household debt by 2021. That’s a rather long time to wait.
Getting household debt under control won’t mean the crisis is over. We need growth for that, and there’s still the question of how to work through the public sector’s debts. But getting consumers back in the game will help. A lot. It’s likely to get businesses back in the game, and the resulting economic growth will let the government focus on reducing its debt levels.
Over the weekend, I dismissed the relevance of the early 1980s as a benchmark for our recovery. A recession that the Federal Reserve can end by lowering interest rates is not the same as a recession that can only end through the slow, painful process of deleveraging. But that’s not to say we’re totally without counterexamples or ways to judge our recovery. Other countries, both in the past and the present, have seen credit bubbles inflate and then pop. Other countries have had to undergo the ugly, seemingly endless work of digging out from beneath the wreckage. And compared to many of them, the United States is doing pretty well.