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Households continue to deleverage

Many argue that too much debt on the part of U.S. households was one of the contributing factors to the 2008-09 recession. Whether that's true or not, households have managed to deleverage impressively since late 2007. Total financial burdens (monthly payments on mortgages, consumer debt, auto leases, homeowner's insurance, and property tax, as a % of disposable income) dropped 11% in the three years ended last September, and mortgage and consumer debt burdens dropped by almost 15%. By these measures, financial burdens are now close to their average of the past 25 years.

Mortgage defaults undoubtedly have contributed to the deleveraging process, but so has a lot of refinancing of existing mortgages—many millions of households now enjoy paying the lowest mortgage interest rates in many generations. According to Merrill Lynch data, the average rate on all existing mortgages dropped by half a percentage point from Sep. '07 to 5.1% in Dec. '10. Regardless of how the deleveraging occurred, household finances on average are in much better shape today than they were three years ago.

I also note that deleveraging has proceeded at a fairly rapid pace even as the economy has been recovering. This underscores the point I've made repeatedly that leverage does not create growth—it merely transfers demand from one person (the lender) to another (the borrower).

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