Ten years after the onset of the global financial crisis, households and banks are in much better financial shape.
Household debt levels have fallen dramatically, from 98% of GDP in 2007 to 77% today (chart). A big decline in mortgage debt is to thank. Households now account for just 22% of all debt in America, down from 27% before the crisis. Similarly, banks and other financial companies now account for 23% of the nations debt, down from 32%. In short, banks and consumers are healthier today.
The opposite is true for the federal government, whose piece of the debt pie grew from 12% to 24% as federal debt ballooned from $9 trillion to more than $20 trillion, or from 62% of 103% of GDP.
Ned Davis Research calls this the “great refi”. Economists have taken to calling it “Beautiful Deleveraging”. As consumers and banks retrenched, the federal government borrowed and spent with assistance of the Federal Reserves low rates and bond purchases, helping to keep GDP growing since mid-2009.
Now the Fed hopes for a “Beautiful Normalization” — returning interest rate policy to normal without upsetting the apple cart. So far, so good, but the final chapter on this saga is still being written.
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