How Deep a Hole Has the U.S. Dug for Itself?

飞雪寒冰

Since the outbreak of the U.S. subprime crisis in 2007, most economists have significantly underestimated the extent of its adverse effects and, in turn, dimensions of the U.S. economic downturn. In early 2008, many expected a V-shape recovery in the second half of the year. They were miserably wrong. Today, many expect a bottoming of the economy in the second half of this year, a solid recovery in 2010 and a trend-like growth beyond that. They may turn out to be wrong yet again, i.e. we may see a deep and prolonged recession in the U.S. that could last well into 2010. Beyond that, the country could see below-trend growth for a few more years, as its economy remains hostage to the effects of deleveraging by households.

My pessimism is driven by an inevitable and potentially sharp reversal of the rapid increase in U.S. household leverage since the turn of the decade. Many economists have correctly pointed out that the current U.S. recession, triggered by the bursting of the housing bubble and the near-collapse of the financial sector, was fundamentally caused by very high U.S. household leverage. However, many still fail to appreciate how the unwinding of household leverage will affect the U.S.’ economic future.

飞雪寒冰

The chart above shows aggregate U.S. household and business debt as percentage of GDP (i.e. private-sector leverage) in the past 40 years. Historically, economic cycles have been characterized by expansions and contractions of private-sector leverage. Whenever the economy became significantly overheated, there would be a sharp rise in private-sector leverage (most notably business debt as a percentage of GDP). It would then be followed by a recession and deleveraging.

A very worrisome trend has been that while the U.S. business debt as a percentage of GDP hovered between 50-70 percent in most of the past four decades, household debt has grown exponentially. As a percentage of GDP, it grew from below 50 percent before the mid-1980s to 70 percent (of GDP) by 2000 and finally crossed the 100 percent mark in 2007.

飞雪寒冰

In the current economic cycle, growth in U.S. household debt significantly outpaced that of business debt, rising to 100 percent of GDP in 2007, implying a staggering 30 percent increase in six years, which was unprecedented in recent history. In contrast, recessions of 1992 and 2001 were triggered by excessive corporate borrowings or business debt, which had grown by only 12 percentage points in the preceding six years. It would not be imprudent to assume that the current recession is almost certain to be much worse than any of the post-war recessions.

In absolute terms, the U.S. household debt figures are mind-boggling. At the end of 2007, U.S. household debt stood at US$13.8 trillion (see chart below), three quarters of which was represented by home mortgages. In the six years from 2001 to 2007, U.S. household debt increased $6.26 trillion, almost equal to the outstanding debt in 2001.

飞雪寒冰

The $6.26 trillion increase in U.S. household debt in 2001-07 was almost 3x China’s average annual GDP during that period. In other words, U.S. households were accumulating debt at a pace equal to about one half of China’s national output every year, between 2001 and 2007. And China is the world’s third largest economy!

How is the unwinding of U.S. household leverage going to play out? Household debt at 100 percent of GDP is obviously not sustainable; it is clear that many of the borrowers are not creditworthy sub-prime or Alt-A borrowers. It is also known that much of the debt taken on by households was used to finance two kinds of assets, housing and equities, and valuations of both were inflated significantly, beyond their underlying intrinsic values. The significant declines in prices of both asset classes are an abrupt wake-up call to the U.S. households. A significant deleveraging is inevitable now. In the next few years, U.S. household leverage should see a prolonged period of contraction, voluntarily or involuntarily.

Debt can be reduced through only two means: repayment by borrowers or write-offs by lenders. Both will take place in the U.S. household deleveraging process.

飞雪寒冰

Assuming U.S. household leverage will revert to its historical mean and move to a more sustainable long-term figure of, say, 75 percent of GDP (against an average of 65 percent in the 1990s), then about $3.4 trillion of household debt needs to disappear. Let us further assume that one-third will be written off and the remaining two-thirds will be repaid.

Under this assumption, household debt (mortgages and other consumer debts) that needs to be written off will be around $1.1 trillion. U.S. banks and insurance companies clearly don’t have enough capital to absorb this magnitude of losses. It is, therefore, reasonable to assume a large chunk of the U.S. financial sector will be nationalized in one form or another in the next few years.



Another $2.3 trillion of household debt will need to be repaid, mainly through future income (i.e. savings) and, to a lesser extent, asset liquidation. In other words, U.S. households will have to spend $1.5-2.0 trillion less in the coming years, a direct dollar-for-dollar hit for an economy which relies on consumer spending for more than 70 percent of its GDP. The amount is equivalent to 11-14 percent of the current GDP.



That will no doubt push the U.S. into a deep and prolonged recession. If U.S. household deleveraging is going to be spread over a period of about five years, GDP growth will be knocked down by 2-3 percent every year, before taking into account the multiplier effect of the reduced consumer spending. This contraction will be on top of the current downward recessionary pressure on the economy coming from corporate retrenchment that has already taken place, as well as the overhang of the woes of the housing sector and excess capacities in several sectors of the economy.

飞雪寒冰

The only way the U.S. can avoid such a frightening scenario is to resort to a very large fiscal deficit on an ongoing basis to fill the demand gap and cushion the potential free fall of economic activity in the country. Effectively, the U.S. government needs to incur outsized ongoing fiscal deficits as long as the private sector is still in a deleveraging mode. The $1.7 trillion budget deficit (12.3 percent of GDP) that the Obama administration has announced is apparently a step in the right direction. However, it is uncertain whether such a large budget deficit is economically (and politically) sustainable in the long run. It would be unwise to expect too much from fixing of the banking system and quantitative easing as U.S. households, after having realized the implications of their astronomical leverage, are perhaps more keen to repay debt than to resume spending.



In summary, the basic laws of economics suggest that once the private sector goes into a significant deleveraging mode, which is almost certain, aggregate consumption of the economy will shrink as more income is set aside as savings, rather than being spent. This deleveraging is going to be a multi-year, rather than a multi-quarter, process. Only a forceful and ongoing fiscal pumping can cushion this downward spiral but that may not be sustainable. Hopefully, and eventually, the U.S., which is still among the most competitive and efficient economies in the world, would regain its vibrancy at some point of time. But this is unlikely before its household leverage gets reduced to a more reasonable level. Those who expect a recovery in the second half of this year are likely to be disappointed. Meanwhile, the rest of the world should adapt to the reality that the U.S. economy is unlikely to pull us out of the current recession.

贴字苹果

这是一首绝世好诗！前段时间论坛出现了一个标题为《对论坛现状献诗一首》的帖子，该贴一发，立刻有了5~6个回贴，正在写对此诗的评价，等写好之后，便找不见了原帖，可能是被移动或是被删除了。这是一首好诗，有点可惜。不过，我的评点恰好没有丢失，发在这里供大家参考。

原帖：

《对论坛现状献诗一首》

如果我将要死去
我决定死在这里

那样，我就会带走
全部的论坛群发者一起殉葬

并且不会让推广小助手的信徒们
看见我怎样重生并开始蹒跚的前行

点评：

一首好诗！先说题目：《对论坛现状献诗一首》足见作诗者思考之多，关注论坛并且经常性思考，对论坛现象特别是影响论坛形象的非正常现象:论坛群发 作出了一种深刻、触及灵魂的思考，又非常谦让地“献诗”一首，诚得诗者谨小慎微谦谦之态。

第一节两句，表达了诗者自己对论坛关注的决心，“死在这里”其心可与苍天齐表，与论坛共生，对论坛献身。何其了得！

第二节，表达了自己对论坛群发软件这种现象的厌恶，我死在论坛里且要论坛群发者一块“殉葬”，把这种充斥论坛的始作蛹者带入另类世界。

第三节中更是表达了对“推广小助手的信徒们”讨厌。不会让他们“看见我怎样重生并开始蹒跚的前行”说明了“我”之与论坛的关系并非靠“推广小助手的信徒们”而成。

诗者非常形象地告诉论坛管理者论坛的管理策略：论坛群发现象易疏不易堵，其深意尽在形象之外思索之中。好诗好诗鼓励鼓励！

编者注：

后来询问论坛管理员得知，其实那是群发软件行业的领头羊：推广小助手发的广告帖子而已。我为一篇广告贴居然这么有雅兴，还评论了这么长一段，也由此有了些许更深的感想，如果我们做网站推广时的广告，都能向这个推广小助手这样，把自己的广告诗歌化，这个广告、这个产品一定成功！


2009年如何推广网站？怎么群发广告、最好的群发软件、又将如何发展？