Thursday, June 11, 2009

Worthy Fellows: 1Q 2009 Edition

There was much wailing and gnashing of teeth in Blogistan today once the latest Flow of Funds report revealed that overall debt still going up. Well, we expected that given how much the government is borrowing. Duh.

The line we need to watch for a few years is the solid red line, which shows liabilities. And it went down slightly last quarter. But remember this data is not adjusted for inflation (because I'm too lazy to dig out the GDP deflator and apply it to the data) so liabilities actually are down slightly more than the slightly indicated on the graph.

So, again, the question is what do we want the household debt level to be? 50% of GDP? 25%? 66.67%? Pie? Let's say 50%, which is the long-term average. It's currently at 100%, or $14.1 trillion. So, to get it down to 50% in 10 years means a rate of reduction at 5% per year (I'm leaving out compounding and inflation - laziness again). That yields - ta da! - $700 billion again. Unfortunately, the $700B derived a few posts back was just the total for consumer credit. So the other $6.3T would have to come out of mortgages. The current total for outstanding mortgages is $10.4T. The total was last at $4.1T in1Q 1999. For reference, in 1Q 1999 the total value of household real estate was $9.8T. Now it's $17.8T, down from $21.8T in 1Q 2007. If the 1Q 1999 value had grown at about the rate of inflation, or 4%, the current value of household real estate would be about $14.5T. But since home prices were already a bit high in 1999, extrapolating the 1995 number results in a value of 13.3T.

Where am I going with all this? Nowhere, really. It's just something ponder.

No comments: