17/11/20: U.S. households: Debt Hostages to the Washington

Massive stimulus deployed in Q2 2020 has lifted substantially aggregate household incomes. Meanwhile, lower interest rates have boosted debt affordability, while new demand for credit collapsed. All of which means that, at least through 2Q 2020, U.S. households enjoyed some really dramatic reduction in the burden of debt:

Income boost from Government transfers in 2Q 2020 was so large, it took household debt to income ratio down by a whooping 3 years in just one quarter, with the ratio currently at the levels last seen in the second half of 1998, moving exactly 3 years from Q3 2001 levels where they stood at the end of Q1 2020. meanwhile, actual debt levels, in US$ terms were down just $52 billion in 2Q 2020 compared to Q1 2020, a decline of only 0.26%. 

Of course, 2Q 2020 boost to incomes was a temporary measure, not related to any real economic growth and not sustainable in the longer run. A return to the pre-COVID19 levels of total debt burden relative to disposable income will shave off 1.455-1.626 percentage points off the households' disposable income net of debt servicing costs, washing out USD295-329 billion from households' budgets. Worse, following normalization of the credit markets, built up debt insolvencies delayed by the pandemic emergency measures will likely push debt to much higher levels as accumulated loans arrears get refinanced and rolled up. Assuming 5% of the loans in forbearance today, this would lead to the household income hit of USD310-346 billion. 

The twin effects of exhausted income supports and rising debt burden can see U.S. household debt burden rising to 135-136 percent of disposable income within the next 12 months.

 

All of which simply goes to show that the U.S. economy is now a complete and total hostage to monetary policy accommodation that is sustaining massive debt subsidies to the households, plus the one-off and non-sustainable income supplements.

17/7/20: Debt Servicing Burden: U.S. Households

Going into the COVID19 pandemic, the U.S. households cost of servicing debt and other financial obligations has been trending at historical lows. The data we have is through 1Q 2020. In April, personal disposable income rose 13.1 percent, before falling 4.9 percent in May. We won't know the data for actual debt servicing burden for June until July 31st, but the above monthly income figures suggest that the burden of overall financial obligations should have fallen to around 13.955 percent by the end of May, the lowest on record:

The above estimate is, of course, based on no extraordinary uplift in debt levels. It is, however, consistent with the significantly loosened conditions for credit in the U.S. banking system through

Given that April 2020 increase in disposable income was driven exclusively by fiscal transfers, and given the fact that a reduced burden of debt servicing for households is likely to sustain lower default rates on debt than would have occurred in absence of such transfers, the above illustrates a de facto channel for monetary policy transmission from QE (deficit monetization) to the households and then to the banks, with credit tightening peaking in early April and then easing through the week of July 10th.