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42 Deleveraging, What Deleveraging
Figure 4.5
Household debt-carrying costs (% of disposable income)
19
14
18
13
17
12
16
15
Financial obligation ratio
Debt service ratio (rhs)
11
14
10
13
9
01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Authors’ calculations based on Federal Reserve data.
Unlike households and financials, the US non-financial corporate sector has
already re-levered, as these firms have taken advantage of the long period of low
interest rates to issue bonds and take on new, orrefinance existing, obligations.
Indeed, loan and short-term market obligations are roughly at their level of the
early 1990s. This lending has mostly been about finance, not real activity. Firms
have built up cash buffers, increased dividends, and bought back stock. Spending
on fixed investment has actually been quite subdued. For now, net interest
payments remain low in light of the Federal Reserve’s policy accommodation.
As opposed to that of households, the debt of non-financial firms tends to
have a longer maturity, lengthening the runway before interest costs take off
substantially when the Fed begins to tighten.
What raises worries about over-borrowing in the private sector is the other side
of the transactions –over-lending by investors. For six years, the Federal Reserve
has kept the short-term interest rate low and purchased long-duration Treasury
securities and convex mortgage-backed securities. This is a direct encouragement
to investors to stretch for yield in alternative, often less familiar, markets. In
effect, the Fed has been ‘recruiting’ investors to purchase risky assets (Stein,
2012). The problem is that not all investors may appreciate the extent of the
risk they acquire in the bargain. This suggests that focusing solely on economywide
aggregate quantities is not sufficient to appreciate potential system risks
associated with the re-leveraging of the US economy. Monitoring also has to
encompass asset prices, risk spreads and activity in specific market niches.
Indeed, across the world there is considerable heterogeneity in the sensitivity
of aggregate demand to housing. There are several reasons to suspect that it is on
the high side in the US: housing tends to make up a higher share of household
wealth; home ownership is higher than in most other countries and reaches
further down the income distribution; and non-recourse, long-term, fixed-rate
mortgages provide an effective mechanism to tap equity. But perhaps most
importantly, homes represent a key source of collateral, sometimes embedded