Was the financial crisis a watershed event that marked a structural shift in attitudes toward debt?
History suggests that major credit busts trigger lasting shifts in credit behavior. The chart above shows that U.S. consumers have become much more focused on saving since the financial crisis.
The Great Depression was a more traumatic event than the recent downturn. Nevertheless, it is interesting to note that nominal growth in U.S. private debt turned negative in 1931 and did not move sustainably into positive territory until 1947. In real terms, the level of private debt did not reach a new peak until the mid-1950s. Anecdotal evidence indicates that many of those who experienced the Depression retained a strong aversion to debt for the rest of their lives.
More recently, Japan’s experience also carries a salutatory message: the country’s Debt Supercycle ended more than two decades ago and has yet to turn around.
The situation in Europe also is bleak with respect to credit growth. In the strongest economy – Germany – there is not a consumer borrowing culture, and that does not seem likely to change anytime soon. Meanwhile, business borrowing also continues to grow at a very subdued pace. In those countries that did embrace credit, a powerful deleveraging phase remains underway and still has a long way to go.
For more on credit trends in developed and emerging economies, please see the latest Inside BCA, The End Of The Debt Supercycle: An Update.