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Are Excessive Household and Corporate Leverage Holding Back a Recovery?

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It's an old cliche' on Wall Street; leverage is a double-edged sword, and the evidence of this double-sword is everywhere. During the last recession, the values of both financial assets and real estate assets plunged sharply, creating weak balance sheets in both the household and corporate sectors.

"Weak balance sheets depress real activity in a number of ways: they raise the cost of credit, they reduce its availability, and they constrain consumption and investment demand," Tim Bianco and Filippo Pcchino observe in a Cleveland Fed Economic Trends piece.

The charts tell the story, and it's a story that has yet to find its ending.

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"Household leverage reached record high levels, and corporate leverage hit near-high levels. Leverage ratios in both sectors have since decreased but remain close to their peaks, and this is likely one factor slowing the current recovery down," the piece notes. Very bad news for those looking for a confirmed end to the economic crisis. In fact, the risk of another full bout of crisis can be seen in the next chart showing real estate prices.

Although real estate prices seem to have bottomed out, they are not showing any clear sign of recovery yet. As a result, leverage in both the household and the corporate sectors remain near peak levels, which will not only continue to weigh on the current recovery but pose grave risks should the recovery deteriorate into another recession.
POSITION:  No positions in stocks mentioned.