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Household financial burdens continue to decline, and that is good

The Federal Reserve today released their estimates of households' financial burdens, and the news continues to be good. The chart shows two measures of financial burdens: mortgage and consumer debt payments as a percent of disposable income (red), and total financial obligations (mortgage and consumer debt payments, auto leases, homeowners' insurance, and property tax) as a percent of disposable income. By either measure, financial burdens are no greater today than they were in the mid- to late 1980s. There is no evidence at all to support the notion that households are over-extended or at risk.

Households have been hard at work deleveraging their finances since the peak of 2007, but they were never seriously at risk to begin with. I've been showing this chart since Dec. 2008, when I argued that "once the financial system finishes writing down the value that has been lost to plunging housing values and collapsing commodity prices, we will discover that the basic economy (the consumer) is still in reasonably good shape." And so it appears today.

I would also point out that while so many commentators fret that deleveraging poses a serious threat to the economy's ability to grow, that is not the case at all. Consider that there has been considerable deleveraging since 2007 (as shown by the decline in financial burdens in this chart), but meanwhile the economy hit bottom about a year ago and has been growing ever since. Economic growth can be facilitated by increased debt, but debt is not essential for growth, nor does declining debt mean that growth must reverse.

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