Balance sheet recessions

You’ve probably seen this phrase a gazillion times (usually in the context of this recession being different). I just saw it again and thought it was worth a clarifying  post. Read on if you wish.

A balance sheet recession refers to a decline in the value of assets (home, stock portfolio) on a personal balance sheet while their debt stays about the same. Also related to this is the chatter about consumer deleveraging (paying down their debt rather than spending money).

 How to repair that deterioration? Save more or look for steady jobs with possible salary increases. Some recent government policies like tax credits attempt to affect income and that too only temporarily. The big disagreement between Keynesians, Austrian business cycle theorists and others is how exactly will consumers react and when ?

Advertisements