…households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.

As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge.

Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.

Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.

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This downturn may not have the 1930s feel of despair, but in large part that is because, as the economist David Rosenberg of the wealth-management firm Gluskin Sheff put it, "The modern day soup line is a check in the mail."