Normal Deleveraging Recession

from Jason Kelly

This is not news to longtime readers, but it’s worth remembering that we knew from the beginning this recession would drag on because it was not caused by a normal business cycle but by deleveraging after bad debt — with both rapacious banks and stupid borrowers to blame. Morgan Housel provides a good recap of this point:

“The recession that started in 2007 was different [from others since WWII]. It was caused by an inherently unsound economy driven by debt. That dynamic changes everything, as deleveraging is like molasses in an economy’s veins. When you find yourself in a debt-driven recession, the result is always the same: a glacially slow recovery. As a McKinsey & Co. report noted, ‘Historic deleveraging episodes have been painful, on average lasting six to seven years.’ More money is going toward yesterday’s bills, which means less for today’s and tomorrow’s.

“The recovery isn’t slow because of regulation, taxes, health-care reform, or some vague ‘uncertainty’ boogeyman. It’s slow because consumers are still deleveraging. And it’s not going to get better until they’re done. … Some look at the economy’s total debt load, including federal debt, and argue that it’ll be around 2017 before things are back to normal at the rate we’re now deleveraging. Since the recession began in earnest in 2009, that would be about eight years of deleveraging. Which, coincidentally, is exactly what history shows we should expect after a debt-driven recession. – 10/3/11