While we can debate until we are blue in the face the actual ins and outs of what causes recessions, most would agree that high debt loads play a significant role. If we look back at the 2008-2009 recession, this is very true. Or the dot.com bubble bursting, debt played a large role. Even go a little further back into history and look at the 1929 stock market crash and subsequent recession, mostly fueled by margin trading (investors trading with borrowed money, i.e., using debt to fuel larger trades).
At this point, not many people are talking about the United States current debt levels. Not only is the U.S. government's debt level out of control, but more importantly consumer debt levels are also out of control, and that is likely the more concerning issue.
When consumer debt gets out of hand, first we begin to see increased levels of defaults. That leads to reduced levels of credit as the institutions who lend credit begin to tighten their requirements to borrow. With less available credit, consumers begin spending less on discretionary purchases because they either can't get credit or have maxed out what credit they did possess. Lower spending leads to lower profitability for consumer facing companies, which then leads to a reduced number of jobs in those sectors. Continue reading "The Debt Storm Is Coming"
