It´s all in the timing – It was not the financial crisis but the drop in NGDP that´s responsible for deleveraging

Garett Jones elaborates on a post by Eli Dourado:

In fact, it looks like households are paying a lot more than required.  Here’s the Flow of Funds ratio of total household and nonprofit liabilities over GDP.  The Great Deleveraging is proceeding apace, and unless that’s all debt forgiveness and bankruptcy, debt payments appear to be higher than the monthly minimum: But I don’t think monthly debt payments are the main way that balance sheets matter.  After all, when people pay down debt that money goes to somebody else–a lender–who can decide how best to invest the repaid cash. Instead, I argue that net worth matters, because net worth makes you trustworthy.  Households with high net worth can borrow at leisure and at low rates; households with high net worth can sell an underwater house and take a $10,000 hit, invest money in a new business, borrow to put the kids through college.  They can borrow and invest easily because they have something to offer, because they can put skin in the game. You know the old song about how freedom’s just another word for nothing left to lose?  High net worth families don’t have a lot of freedom…and that’s why bankers love them. So what’s happened to net worth since the financial crisis?  I think you know:

The last time we were at this level of net worth [Update: for more than a couple of quarters] was in the late 90’s.  A lot of high net worth families–the kind that bankers love to see walking through the door–have somehow disappeared in the last few years.

The last paragraph is a bit of a stretch. What´s “off place” are the two wide swings in the net worth ratio since the mid-90s.

As the chart below shows, these are clearly linked to, first the stock market gains of the second half of the 90s, and then to the second upswing in stock prices and concomitant increase in house prices between 2003 and 2006/07. The point after which NGDP tanked is signaled by a red dot in the charts. Observe that by that time the net worth ratio had completed most of its fall.

Note, however, that even with much lower net worth household could still borrow. That dries up only after nominal spending tanks!


Additional evidence is provided by the unemployment rate. It also only skyrockets when spending takes a plunge. That´s when the recession turned into depression!


HT: Saturos

3 thoughts on “It´s all in the timing – It was not the financial crisis but the drop in NGDP that´s responsible for deleveraging

  1. It is not the NGDP fall the responsable of Financial crisis but te opposite. It would be too easy. I name Financial crisis the net worth imbalances between agents. Or as Fisher said, Debt deflation crisis.

    • Luis
      In 2000 net worth dropped significantly. There was no “financial crisis”. That´s the reason for the title “Timing is everything”. Everything went to “hell” ONLY after NGDP tanked, and that´s the Fed´s responsibility.

  2. Marcus, I can’t believe that only flows matter. Funds disequilibria matter a lot.
    Ther is a long tradition on that, not incompatible with monetarism. Since Bagehot to Fisher, and now Krugman (
    In 2000 There were notable unstability, as the fall in Nasdaq assets prices, Well before the NDPB faltering could ne registered.
    I think that the effect of assets prices fall in expectation are quite more rapid that any others.

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