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Bond Yields Are Falling Because the Consumption Bubble Is Imploding

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What gets lost in the larger economic debate is that this deleveraging cycle is not so much about correcting a debt and real estate bubble but rather correcting a consumption bubble.

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Consumption, Household Debt, and Net Worth Vs. NGDP



Consumption and household debt didn't just rise in relation to the size of the economy, they also rose as a percent of income. Credit was used to subsidize income in order to increase spending which in turn drove GDP growth. For decades the US economic growth engine that we all love to brag about has really just been an exercise in consuming stuff we didn't need with money we didn't have. This generational trend is now in reverse and potentially so massive that it transcends monetary and fiscal policy.

Personal Consumption and Household Debt Vs. Income



These relationships between consumption and debt are on a track to revert to more sustainable levels vs. income. I believe this is what the bond market is telling us. Just as the 10-year yield is tightly correlated with nominal GDP growth so too is it tightly correlated with consumption growth. Over the same 50-year period consumption growth has exceeded the 10-year yield by 50bps. Based on the historical relationship a 2.00% 10-year is discounting longer term consumption growth of just 2.5% implying a 2.25% nominal GDP growth rate. These levels of growth are signaling a chronic recessionary environment.
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