Banc of America Securities-Merrill Lynch economists think getting U.S. household debt-to-income back to the long-term trend will require eliminating $1.75 trillion in debt, assuming no change in disposable income. That will probably take years.
And that’s their more conservative forecast, just taking the ratio from its current level of 131 percent down to 115 percent. To get back to the average seen in the 1990s, $4.35 trillion in debt would have to be eliminated.
”Either way you look at it, U.S. households will remain mired in a period of balance sheet repair,” the economists wrote in a note to clients. “And, the continued debt elimination necessary to reach a more sustainable household balance sheet means that the ability of the U.S. consumer to lead the recovery on a sustained basis will be limited. This is why we do not expect the consumer to lead the economy out of the recession. This is also one of the risks to the view that th U.S. economy is on the verge of a V-shaped recovery.”