By: Larry MacDonald

Household debt is at a record high relative to assets in the United States, according to Gluskin Sheff Chief Economist & Strategist David A. Rosenberg. As can be seen from the chart below (taken from a recent Rosenberg research note), the household debt-to-asset ratio is now 21.0%, compared to prior cycle lows around 13.0%.

Getting back to the low “would be consistent with over $5.0 trillion of debt elimination,” says Rosenberg. This is too much for even the U.S. government to absorb, he declares: “A goodly chunk of this excess debt — bringing credit into realignment with the permanently new and lower level of household net worth — is going to have to be paid down (or defaulted on).” Hence, Rosenberg’s bullish stance on government bonds and bearish stance on stocks.

No doubt some of the debt will be extinguished, as it should be. But there is also a denominator in the debt-to-asset ratio. It can move up and take the ratio lower too. Indeed, the previous declines and cyclical lows in the series may mostly reflect, it seems to me, periods of asset inflation brought on by Fed monetary expansion. Something similar could happen again this time around.

Just as I’m not sold on the view we are heading for a raging inflation problem, neither am I personally sold on the debt-deflation thesis. Never underestimate the power of policymakers to pull rabbits out of the air or do whatever it takes to save the system. The bears are right about the system being in need of a great purge but the government is the “house” in this great casino.