The most important change in borrowing in the US over the past three years was who has borrowed, not how much was borrowed. The credit super-cycle was largely a private sector activity, but the public sector has been the only borrower (in net terms) over the past two years (Exhibit 2). This swap was critical. The private sector has reduced its leverage (and increased its saving), but this has only been made possible by the unprecedented peacetime increase in leverage (and fall in saving) by the public sector. To focus in isolation on lower private sector leverage (and rising saving) as a sign of ‘healing’ misses the point that it’s only been possible due to the stretch in public sector finances.
Click on charts to enlarge, courtesy of Morgan Stanley.
While there are serious questions about real deleveraging by US households, however, the "sort of" conclusions at the end of Morgan Stanley's note sound like this:
Borrowing to buy pre-existing assets can affect the valuation of those assets. Most periods of sustained asset revaluation go hand-in-hand with sustained leverage increases (Exhibit 6). While sustained deleveraging does not imply sustained macro weakness, I think it will put downward pressure on asset valuations. I think most assets are now expensive relative to history. Deleveraging points to asset valuations falling.
I believe one should sort out what they are buying now - potential cash flows or real assets?
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