South By North Strategies, Ltd.

Rortybomb rounds up some of the recent evidence about household deleveraging of debt.

Back when this crisis first started, people understood that this was going to be an ugly, ugly process. There were two ways of helping this process along. The first was modifying defects in the bankruptcy code to help with writing down mortgage debt, often referred to as lien-stripping or the cramdown bill. The second was a period of short sustained inflation, which was being recommended from all kinds of ideological places …
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That our current situation is the exact opposite of this happening would be an understatement. The cramdown bill failed and we’ve got a period of moral panic and hysteria around strategic defaulters, those evil-doers that nobody can actually quantify as actually existing.  We also have Sarah Palin and the conservative base teaming up with the Hard Money Right to scream “Fire!  Fire!” on Noah’s ark.  They are going to try and make 2011 a year of siege against the Federal Reserve, stoking fears that we’ll have an inflation crisis any day now when we are actually disinflating.
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The result is exactly what you’d expect: our consumer deleveraging is mostly taking place through defaults on loans, the most painful, externality-prone, and drawn-out mechanism we have for resolving bad debts. That savings rate reflects less our ability to pay off our debts and more our inability with an unemployment crisis and the collectors kicking in the door.