It may be about as fun as having a tooth pulled, but cutting very high levels of debt in an economy is more of a process than a short, sharp event.
That means that for economies like that of the United States, which has private debt equal to 268 percent of gross domestic product, the outlook is for a very long period of subdued growth and one in which there is no assurance that the tools of economic management, traditional or not, will be effective.
The Federal Reserve released its Flow of Funds report last week, detailing the state of the country’s various balance sheets and the news was good, in its own way, but not encouraging.
Household net worth contracted in the second quarter, mostly due to falls in the value of financial assets, falling by about $1.5 trillion, or about 3 percent. Net worth is down a substantial 12.3 trillion, or nearly 20 percent, from its peaks in 2007.
Deleveraging is happening, at least in the private sector, with the ratio of debt to GDP down by a very chunky 10.3 percent, a fall that is already half again as large as the very painful running down of debt in the 1970s. Even so, there are good reasons to think that we’ve not yet paid off or defaulted on enough debt to be on solid ground to leverage up again.