There’s been talk in the blo­gos­phere lately about whether or not devel­oped economies are delever­ag­ing, i.e. wind­ing down their debt.

Some recent posts, under head­lines such as “The Age Of Con­sumer Delever­ag­ing Is Over” and “Delever­ag­ing is So 2011,” have argued that at least in the United States, con­sumer delever­ag­ing appears to be a thing of the past.

My take, how­ever, is that in many sec­tors of the US econ­omy, delever­ag­ing hasn’t hap­pened at all. In fact, the notion that the United States is delever­ag­ing is mostly a myth.

Now to be fair, delever­ag­ing has occurred in at least one sec­tor of the econ­omy: The US finan­cial sec­tor, which has sig­nif­i­cantly reduced its debt. But once you move out­side of the finan­cial sec­tor to the real econ­omy — house­holds, cor­po­ra­tions and gov­ern­ment — the great delever­ag­ing idea evaporates.

The dirty lit­tle secret is that US non-financial debt rose by more than $5 tril­lion from the end of 2007 through the third-quarter of 2011. In the last year alone, the real econ­omy has added roughly $1.4 tril­lion in debt to the over­all US non-financial total.

It’s true that US house­hold debt has con­tracted in recent years, but the con­trac­tion has been mod­est and is mostly due to bank write-offs. Since a debt peak in early 2008, US house­holds have shed roughly $800 bil­lion in debt. And as pointed out by the blog posts cited above, new US con­sumer credit num­bers show increas­ing con­sumer debt.

At the same time, cor­po­rate debt has been ris­ing as com­pa­nies take advan­tage of record low yields. Since 2008, cor­po­ra­tions have added approx­i­mately $500 bil­lion in debt to their bal­ance sheets.

This half-trillion increase, how­ever, pales in com­par­i­son to the debt binge of the fed­eral gov­ern­ment. Pub­li­cally traded or net fed­eral debt has risen by more than $5 tril­lion since late 2007. As you can see in the chart below, this puts over­all US non-financial debt at a bit under $38 tril­lion (for the purists, this arguably under­states the total by $5 tril­lion as it ignores gov­ern­ment debt held by the Social Secu­rity Trust Fund).

In short, it’s hard to argue that the US econ­omy has delever­aged. Since 2009 the US debt bur­den has been rel­a­tively sta­ble when com­pared to GDP. Essen­tially, nom­i­nal pri­vate sec­tor debt has sta­bi­lized, while pub­lic sec­tor debt has sky­rock­eted in an attempt to ease a col­lapse in consumption.

As I’ve men­tioned before, this can con­tinue for a while longer. In a world in which investors are short of safe invest­ments, most are still will­ing to give the ben­e­fit of the doubt to the US gov­ern­ment and lend long for the priv­i­lege of a safe place to park their money.

But for those who believe that debt lev­els are still unsus­tain­ably high — as I do — there does even­tu­ally need to be a reck­on­ing. When this even­tu­ally hap­pens, lend­ing to the gov­ern­ment for 2% may no longer seem like a safe haven.

Source: Bloomberg

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