The Great Deleveraging, Chapter One

Americans are taking on less debt and saving more… really?


U.S. consumer credit fell for the fourth straight month in May, the Federal Reserve reported late yesterday. Credit inched down at an annual rate of 1.5% during the month — a $3.2 billion drop to a total consumer debt load of $2.52 trillion. Coupled with the previous three months, we’re now experiencing the biggest and longest consumer deleveraging since 1991. We even have a somewhat respectable savings rate — 6.9%, the highest since 1993.

While we welcome this deleveraging, it still doesn’t seem legit. With unemployment at a 26 year high and the sudden disappearance of easy-money credit, we wonder if this balance sheet restoration is a matter of choice… or if the lowly American consumer is just playing the hand he’s been dealt.

Then there’s this chart: Chart

“The U.S. household sector is currently saving more and deleveraging,” adds Rob Parenteau, “while lenders both here and abroad remain wary of lending, except, apparently, in the case of bank loan officers for high rollers in China.

“To be clear, the household and business sector debt reduction is still in its early stages and has been dwarfed by the massive deleveraging of the financial sector itself as the so-called ‘shadow banking system’ has either collapsed or moved onto the Fed’s balance sheet.”