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.