Debt-deleveraging arrives

It has taken a while to show up, but the long-expected contraction of total credit market debt outstanding has finally begun. The effect is disguised somewhat due to the GDP revisions that reduced Debt/GDP from the previously reported 375 percent to 373 percent, but the raw debt figures show a clear, albeit small, decline.

Q1 2009 373.2 percent $52,915 billion
Q2 2009 373.3 percent $52,793 billion

To put into perspective how even such a small decline such as this $122 billion one is unusual, the Fed’s Z1 report shows how debt rose to the present level from $13.8 trillion in 1990 by increasing more than $500 million per quarter and at a quarterly rate of $921 million since 2004. Debt expansion even continued through 2008 and the first quarter of 2009, although it slowed to a rate of $579 billion per quarter.

This decrease in total credit market debt may be the first sign of the debt-deleveraging process that Steve Keen of Debtwatch has already detected taking place in Australia now starting to roll in the USA.

“We are currently deleveraging at the 4% rate, and debt has fallen from 165% of GDP in March 2008 to 159% today–a 6% fall as a percentage of GDP, as noted above.”

Note that this $122 billion decline in total debt has taken place despite a large $390 billion increase in state, local, and federal debt and another $40 billion increase in corporate debt. However, it is NOT the household sector that is driving the deleveraging, although households did shed nearly $133 billion of debt in the first half of the year. The primary contributor is the financial sector, which has reduced its debt burden by $562 billion since peaking at the end of 2008, most of it in the second quarter. This suggests that the next stage in the global economic contraction is on deck and ready to begin in earnest once the markets turn south again.