It’s commonly thought that the signal that the deleveraging cycle is behind us will be when household debt levels get back down to where they were before the recession. I think that view is wrong, however, in that it discounts the “Minsky moment” when both borrowers and lenders generally flip from under-pricing to overpricing risk, from reckless risk-seeking to risk aversion, from gorging on debt to starving.
So I’m looking for credit indicators not just to be going down, but to be going down for a while and then reversing course. That’s what you see in the most recent outstanding consumer credit reports as shown below (annual % changes), including both short-term, or revolving debt (like credit cards), and longer term debt, like student loans and cars (but nothing related to real estate).
No one’s looking for another debt bubble, and as I wrote about here, debt as a substitute for earnings has been a serious structural problem for some in the middle class. But the fact that households are availing themselves of credit again is likely a good sign.