In an earlier blog post, I cited some arguments by economist Richard Koo, who contends that monetary policy levers will not work as intended while businesses and consumers are busy repairing their balance sheets. This recent article from the Wall Street Journal reports that consumers are paying down debt with a vengeance:
On Monday, the Federal Reserve is expected to say total consumer credit outstanding fell by $1 billion in April to $2.45 trillion. While that may seem like a rounding error, it will mark the 17th monthly decline in the past two years, an unprecedented stretch in the series’ 67-year history.
The article goes on to say that the consumer still has a long way to go to reduce debt to the level of even the mid-1990s:
Even so, the consumer has more work to do. The Fed’s quarterly “flow of funds” report, due out on Thursday, is likely to show the household sector’s debt level, which includes both consumer credit and mortgage loans, remained at about 20% of total assets in the first quarter.
In the mid-1990s that ratio was around 15%, compared with a peak in the first quarter of 2009 of about 22.5%.
Koo certainly seems correct in his assessment that consumers are in the mode of repairing their balance sheets. Less clear is his contention that monetary policy may not work as intended-but I’m sure we will find out about that soon enough. In the meantime, it may pay to be flexible and tactical with one’s asset allocation.
