Personal Debt Could Prevent America's Recovery

Economic experts are worried that the level of private debt in America could prevent the nation’s
economy from fully recovering for years and lead to a possible, “Lost Decade.”

The problem with debt is not getting any better. In fact, U.S. personal debt is increasing. In May,
the Federal Reserve of New York released numbers showing that U.S. household debt was an
estimated $11.5 trillion at the end of March, an increase of $33 billion since the end of 2010.

The household debt trouble began during last decade’s housing bubble when consumers and
businesses acquired too much debt, particularly in real estate. This debt became especially
burdensome when the financial crisis and housing bust hit. As people saw their incomes drop,
they perceived their debt levels as being too high, which led them to cut back on consumer
spending. This is troubling, experts say, because the economy cannot fully recover until
consumers start spending again.

Experts say that the personal debt level problem is more than an issue of perception. “Burdened
with underwater mortgages, excessive debt, and subpar saving, U.S. consumers are stretched
as never before," Stephen Roach of Morgan Stanley Asia, recently wrote.

Carmen Reinhart of the Peterson Institute for International Economics said, “If historic norms
hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this.
I don't think the next six years look great. I think we're in for a lot of disappointment."

There is some concern that the level of debt will give America a “Lost Decade,” similar to the 10
years of economic stagnation that Japan suffered through following its real-estate bust in the
early 1990’s.

The experts tend to agree that however the economy eventually recovers, it will be a long
haul. "The deleveraging process doesn't really get underway quickly," Reinhart said.

Follow @CreditDonkey or write to Andrew Green at andrew@creditdonkey.com

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