Are we really in the state of de-leveraging?

The Fed published its latest Flow of Funds report today. One key takeaway: While total debt is growing more slowly, it is still growing. Since Q3 ‘08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand. In some ways, what the US governmetn currently doing is not to reduce the debt level and de-leverage the economy, on the contrary, they just transform the massive debts in the private sector to the public sector, and in the end, to the hands of foreign lenders, imagine those countries (China for example) that have accumulated large amounts of US Dollar assets, mainly in the form of US Treasuries.



As a percentage of GDP, debt continues to expand, from 368% at the end of Q4 to 375% at the end of Q1.

It’s been said that the income statement is the past, but the balance sheet is the future. The balance sheet is getting worse. As the equity value of the economy is going down—think the stock market and housing equity; the debt level is still going up. In other words, as a whole economy, we are still in the process of leveraging, rather than de-leveraging. The origin of the current crisis is the credit bubble, which continues to inflate in the aggregate.

The only way to climb out of a debt-induced depression is to pay down debt or to write it off. Levering up only delays the inevitable.

When will the clock stop for the leveraging bomb?