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"Deleveraging" Debt As a Society: What It Tells Us About the Health of the U.S. Economy As We Leave the Great Recession Behind By Tara C. McConkey, CFA®
November 17, 2016

The illustration summarizes all U.S. domestic debt in aggregate and compares it to the size of the economy. Note that debt relative to the size of the economy had been expanding for a considerable period of time. From 2000 to 2007, debt accelerated at an exceptionally fast pace, driven primarily by the explosion in household mortgage debt and bank debt.

U.S. Total Domestic Debt vs. GDP
Source: Flow of Funds Accounts, Federal Reserve. Gray bars indicate recessions.
By 2007, total debt had reached 3.5 times the size of our economy, and as we entered into the Great Recession, it became too costly for overextended households and over-levered banks to maintain their aggregate borrowing.

With too much debt, we have had to "deleverage" as a society. The deleveraging process has slowly come now to an end, but this process has acted as the strong headwind limiting economic growth, resulting in our subpar recovery.

Typically, deleveraging processes from other global debt crises have taken on average about 7 to 10 years to run their course. We are now more than seven years into the cycle and likely close to the end as the new presidential administration begins in 2017.

As the deleveraging process comes to an end, we would expect domestic growth to eventually accelerate slightly. Fortunately, ultra-low interest rates have elevated cash flow coverage ratios despite elevated levels of borrowing.

TAKEAWAYS:
  • The reason our current economic recovery is subpar is that we as a society are shedding the debt that helped bring about the Great Recession.
  • We are close to the end of this cycle, which spells some promise for future growth for the next generation.
  • The Federal Reserve may feel it is in good position to boost interest rates a quarter point when it meets in December.

Disclosures:

Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of Nov. 17, 2016. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company Investment Policy Committee.

This material is not a recommendation of any particular security, is not based on any particular financial situation or needs, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

The information in this commentary should not be construed as an individualized recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.

Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situations.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.

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ABOUT THE AUTHOR

Tara McConkey
Tara C. McConkey, CFA® Senior Vice President, Senior Portfolio Manager Commerce Trust Company
Tara is senior vice president and senior portfolio manager within the family office services group for Commerce Trust Company. Upon gaining a thorough understanding of a client’s needs and goals as well as assessing the client’s entire financial situation, she works with our investment research team to construct a portfolio to help clients achieve their long-term goals. Tara comprehensively represents our research- and goals-based investment process, starting with the initial assessment and creation of an investment objective to ongoing evaluation and adjustments based on changing market and life circumstances. With a deep knowledge of the market and experience in investment management, she serves clients with thought leadership, insight, and consulting services. She most recently served as a portfolio manager and team leader of TIAA-CREF Trust Company. Tara has more than 22 years of experience and previously worked with Northern Trust Company in Chicago as a portfolio manager for high net worth clients. She received her master of business administration degree and bachelor of science in business administration degree from Saint Louis University. Tara holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA St. Louis Society, for which she previously served as director of the CFA St. Louis Society.
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