Monday, December 20, 2010

Debt, Borrowing & Spending

The Lehmann Letter SM

We’re faced with this anomaly: Everyone hates debt, but it will take more debt to finance the spending required to boost the economy.

Q: How can you borrow more to finance increased spending while repaying your debts?

A: You can’t.

If households and businesses are to restore their balance sheets by rebuilding liquidity and retiring debt, they can’t at the same time borrow and spend the economy to prosperity.

Private Borrowing

(Click on chart to enlarge)

(Recessions shaded)

The chart illustrates the precipitous drop in borrowing that accompanied the recession. Borrowing turned negative when households and businesses began repaying their debts. Those repayments grew to over $500 billion and then shrank. Here are this year’s data:

Q1: -$76.3 billion
Q2: -$302.8 billion
Q3: -47.8 billion

Perhaps, as the New Year begins, repayments will cease and new borrowing will blossom, resuscitating spending. Let’s hope so.

The key question: Have the recent repayments been sufficient to reliquify private balance sheets and enable a new round of private borrowing and spending? Let’s hope so.

One possible problem: The repair was incomplete, enabling only limited borrowing and spending. We’ll see.

Meanwhile, keep the following in mind. Business has dealt with the problem more swiftly than households. Business balance sheets are in good condition, brimming with liquidity. That’s because revived earnings have restored cash flow. Not so for households: High unemployment and weak earnings have impeded recovery for their balance sheets. Consumers need more time.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

No comments: