From: Bridgewater Daily Observations [mailto:Bridgewater_Daily_Observations@bwater.com]
Sent: Monday, December 16, 2013 9:21 AM
To: John Broussard
Subject: Bridgewater Daily Observations - "US Deleveraging Update"
US Deleveraging Update
As we have described previously, the US economy has gradually been normalizing: balance sheets have gradually healed, savings rates have gradually declined, credit has slowly improved, and levels of employment have become less depressed. Debt levels fell very quickly in the first few years after 2008 due to a combination of extremely weak borrowing, large debt paydowns, and defaults by the private sector, while the government was the only borrower, offsetting some of the private sector deleveraging. Then over the past two years, debt levels stabilized as private sector conditions have continued to normalize. Households have started to increase their borrowing, especially through the mortgage market as the housing market has gradually improved off depressed levels. Large businesses with healthy balance sheets have been significant borrowers, and small business credit is starting to improve. And as the private sector has normalized, government deficits have been steadily falling from extremely high levels due to cyclical improvements in the economy and some spending cuts. Of course, the pickup in borrowing has been to a significant extent supported by the Fed’s QE purchases, which currently amount to roughly 2/3 of the net new credit in the economy; given the recent improvement in private sector credit creation the Fed is now more likely to begin tapering sooner.