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Recently released data for Q4/10 show that households' financial burdens continued to ease. Total financial obligations (auto leases, homeowners' insurance, property tax, mortgage and consumer debt), as a percent of disposable income, have fallen almost 12% from their Sep. '07 high. As the chart shows, debt and financial burdens have on balance been unchanged since 1985, after a rise in the mid-2000s. That equates to some meaningful deleveraging, and as I have pointed out before, this deleveraging occurred during a time of economic recovery.

Debt is not essential for a recovery, and reducing debt is not contractionary. Debt facilitates economic activity, but it is not necessary for growth. You can't borrow your way to prosperity, but lending and financial market intermediation can make an economy more efficient. The problem with debt comes when consumers increase their borrowing in the belief that their financial and economic conditions will be unchanged or improved in the future, only to find out that the future did not turn out as expected. This is not a fatal problem, but it does throw a wrench into the economy's gears that can take some time to work out.

In short, I think the reduction in financial burdens is a healthy sign that reflects the fact that people and businesses have been actively adjusting to changing circumstances, and it is this dynamic response to adversity that sets the stage for a new cycle of growth.

Source: Households' Financial Burdens Continue to Ease