C&B Notes

Where Are Households in the Delevering Cycle?

Anyone following the degree of U.S. household leverage could see that the trend was unsustainable and housing prices were a bubble.  Accepted wisdom holds that the key to turning around an economy in a recession is to get consumers borrowing and consuming again.   While that is certainly true in the short-run, we prefer equity financing in the long run and do not believe that nations get rich from ever-increasing leverage.   The ability of a consumer or a business to perfectly arbitrage the spread between the cost of debt and equity is not the determining factor in the long-term success story of anyone or any business that we know.  The current deleveraging by households from historically extreme levels is proper in our judgment.

>>  Click here to read the full study from The Federal Reserve Bank of Richmond