Healthy households

In the first quarter of this year, the financial burdens of U.S. households were as low as they have been since the numbers were first tallied in 1980, according to data recently released by the Fed. It's a natural response to the near-death experiences of many individuals during the 2008 financial crisis: most everyone wanted to shore up their finances by saving more and paying down debt.

Earlier this month I highlighted the fact that the wealth of U.S. households reached new all-time highs in the first quarter, and that was due in large part to the healing processes that began in the wake of the financial crisis. It's all part of the same story: risk aversion surged in the wake of the financial crisis, and this resulted in a big increase in the demand for money, which in turn shows up in a big reduction in the leverage of the household sector.

Here are some charts that tell the tale:

U.S. households' financial burdens (required payments on debt, homeowner's insurance, and property tax as a percent of disposable (after-tax) income) have been a relatively low 15% for the past two years. The reduction in debt burdens has come chiefly from reduced debt relative to income, and lower interest rates.

As a result of smaller debt burdens, increased savings and rising equity and home prices, household leverage (total liabilities as a percent of total assets) has dropped by 30%, from a high of 22% in 2009 to the current 15%. Household leverage today is about the same as it was in 1990. In a sense, we've rolled back some 25 years of debt accumulation.

If we have a problem today, it is not "too much debt." On the contrary, the private sector has plenty of capacity to take on more debt. Our public sector, of course, has gobs of the stuff, but at least the deficit has shrunk to a manageable size—for now. At about 74%, federal debt relative to GDP is large, but not terribly large, and is relatively stable.

The U.S. government has borrowed tons of money at historically low interest rates, and has been skewing the maturity of its debt longer for several years now—as any rational borrower would have, in order to "lock in" low rates. If interest rates rise, Treasury will look like a genius, while private sector owners of all that debt will look like fools. One reason that short-term interest rates are still close to zero (3-mo. T-bill yields are essentially zero as I write this) is that bond fund managers are very much aware of the risk of rising rates, and are hedging their portfolios by stocking up on cash and cash equivalents. (Very low short-term rates are prima facie evidence of very strong demand for short-term securities.) But they can only do so much, since holding zero-yielding cash means giving up lots of extra yield while waiting for interest rates to rise, and the timing of that rise is still very much up in the air. I've been wrong on this for years, but that doesn't deter me from continuing to think that yields are more likely to rise by more than expected, than to fall further.