Eli Dourado has a great post on whether we can believe we’re still in the short run (see Bryan’s critique here). Along the way, Dourado calls into question the sticky debt channel, correctly noting that according to official estimates, household debt payments are at quite low levels–and a big reason is because of today’s low interest rates.

However, the data he draws on for household debt payments don’t report how much households are actually paying: The data instead report “estimated required payments.” Glad to be corrected but that sounds like minimum payments on credit cards, required mortgage payments, etc.  

In fact, it looks like households are paying a lot more than required.  Here’s the Flow of Funds ratio of total household and nonprofit liabilities over GDP.  The Great Deleveraging is proceeding apace, and unless that’s all debt forgiveness and bankruptcy, debt payments appear to be higher than the monthly minimum:


But I don’t think monthly debt payments are the main way that balance sheets matter.  After all, when people pay down debt that money goes to somebody else–a lender–who can decide how best to invest the repaid cash. 

Instead, I argue that net worth matters, because net worth makes you trustworthy.  Households with high net worth can borrow at leisure and at low rates; households with high net worth can sell an underwater house and take a $10,000 hit, invest money in a new business, borrow to put the kids through college.  They can borrow and invest easily because they have something to offer, because they can put skin in the game.  

You know the old song about how freedom’s just another word for nothing left to lose?  High net worth families don’t have a lot of freedom…and that’s why bankers love them. 

So what’s happened to net worth since the financial crisis?  I think you know: 


(Thanks for Bill McBride for creating the graph)

The last time we were at this level of net worth [Update: for more than a couple of quarters] was in the late 90’s.  A lot of high net worth families–the kind that bankers love to see walking through the door–have somehow disappeared in the last few years.  
Another old saying, this one about bankers: They only lend you money when you don’t need it.  Well, now we need it.  
We are not as trustworthy as we thought we were.