News that U.S. household debt rose at the fastest pace since 2007 in the fourth quarter of last year cheered markets. Investors wonder if the long deleveraging cycle that’s stifled growth for the past six years is finally over.
Don’t break out the champagne just yet. Although real credit growth in the U.S. has been positive for roughly two years and is approaching a 4 percent rate, it remains subdued by precrisis standards, and much of the increase reflects borrowing by companies to finance share buybacks rather than investment. Household borrowing has turned positive only recently and is 9.1 percent below the 2008 peak. The crisis appears to have had a lasting impact on consumers’ attitudes toward debt. In the euro area real credit growth is flatlining after several years of decline, while in Japan the move toward positive credit growth is a welcome change but still a very tentative one.
The debt supercycle may have stopped tanking, but it’s far from clear that Western consumers are ready to go on another leveraging binge.
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