The household borrowing binge that preceded the housing bust wasnt just a U.S. phenomenon, a new paper by the Federal Reserve Bank of San Francisco shows.
Reuven Glick and Kevin Lansing show household debt as a percentage of disposable income grew to especially high levels in places like Ireland, Denmark and Norway between 1997 and 2007. Not surprisingly, those countries have been going through their own consumption busts as households try to bring their debt levels back down to manageable levels.
This picture shows household debt as a percentage of disposable income:
This shows countries with the biggest decline in consumer spending:
The authors conclude: The efforts of households in many countries to reduce their elevated debt loads via increased saving could result in sluggish recoveries of consumer spending. Higher saving rates and correspondingly lower rates of domestic consumption growth would mean that a larger share of GDP growth would need to come from business investment, net exports, or government spending. Debt reduction might also be accomplished via various forms of default, such as real estate short sales, foreclosures, and bankruptcies.