Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.
Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it’s twice that amount – $52 trillion, of which $38 trillion is private…or more than two and-a- half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings – in interest and principal payments.
If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero – so that is not now a source of debt reduction.
Now, let’s go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty…19 years. From 1990 to 2009.