The American economy was laden with debt before Kovid. This is bad news for a recovery.



Coronavirus marked the end of the longest economic expansion in American history. This was not the only problem. When America followed in a deep recession, it was debt-laden.

Why is this thing? In economies with high debt, there is generally a weak recovery. Businesses and consumers focus on cutting their liabilities during a recession rather than spending cash – and an economy needs a rebound in order to spend.

All told, borrowing consumers add up to $ 64 trillion in business and government debt during years of low interest rates. How much is that This is more than three times the GDP of the country. The series of charts below explains how we got here and what it means for any recovery.

Growth of government, business *, household debt and unfunded pension obligations

Growth of government, business *, household debt and unfunded pension obligations

Growth of government, business *, household debt and unfunded pension obligations

Development of government, business *, domestic debt and unused pension obligations

State and local government

Homes and non-profit organizations

State and local government

Homes and non-profit organizations

State and local government

Homes and non-profit organizations

State and local government

Some types of loans matter more than others. The most important part of a recovery is consumer spending, which accounts for about 70% of the US economy. According to a study of advanced economies over 30 years by researchers at the International Monetary Fund, high household debt levels prolong the recession and increase its severity.

Economic growth over the past decade — including a big gain in the stock market and US house prices — has benefited the wealthiest households most, while low-income people lag behind. Real median household income fell after the financial crisis and did not cross the inflation-adjusted record of $ 61,526 until 2016.

Actual household spending during the preceding recession …
Median income, 2019 dollars

High household debt-to-income ratio

Business year after year

Actual household spending during the preceding recession …
Median income, 2019 dollars

High household debt-to-income ratio

Business year after year

Median income, 2019 dollars
Actual household spending during the preceding recession …

High household debt-to-income ratio

Business year after year

Actual household spending during the preceding recession …

High household debt-to-income ratio

Business year after year

Median income, 2019 dollars

Mortgage loans, mostly held by better-paying workers, have not changed much. Conversely, low-income families have increased their lending with auto loans, student loans, and credit cards. Before the epidemic, the percentage of fragile auto-loan balances had reached the final level of the financial crisis. Middle and low-income consumers spend a greater share of their earnings, so higher debt levels mean they will consume less.

Consumer non-credit level

The loan percentage remains 90+ days due to the type of loan
Increase in consumer credit by type

Percentage of loan remaining 90+ days due to type of loan
Increase in consumer credit by type

Percentage of loan remaining 90+ days due to type of loan
Increase in consumer credit by type

Increase in consumer credit by type
Percentage of loan remaining 90+ days due to type of loan

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Businesses have borrowed at a record pace in recent years, leading some economists to raise alarm over the past year that high levels of corporate debt during recessions may force companies to slow spending and renting which They get paid or are overwhelmed by their payments.

Instead of using cash to invest in their businesses, many companies bought back stock to raise share prices. The buyback in 2018 set a record $ 806 billion after a tax overhaul that lowered rates for many companies.

The quality of corporate debt suffered, with the amount of corporate triple-B rated bonds – the lowest quality investment-grade loans in the last decade – more than doubling. Companies with such ratings often risk downgrades, defaults and high borrowing costs when they become difficult. Until now, government incentives and low interest rates have helped companies avoid financial conflicts.

Stock buyback of S&P 500 companies

Triple-B issues corporate bonds

Share buybacks of S&P 500 companies

Triple-B issues corporate bonds

Stock buyback of S&P 500 companies

Triple-B issues corporate bonds

Stock buyback of S&P 500 companies

Triple-B issues corporate bonds

Corporate category * rating by category in trillion

Corporate category * rating by category in trillion

Corporate debt in trillion * rating by category

Corporate debt by rating category,
In trillions

Meanwhile, state and local governments are not sufficient to meet the increasingly costly costs of pensions. This will lessen their problems now that sales and income tax taxes have declined. Many state and local governments have already cut services and laid off workers.

The previous recession has brought back governments’ ability to fund pensions. Some states with heavy liabilities have taken loans tied to specific streams of revenue, like sales tax, to keep debt costs down, which will now make it even harder to pay.

Percentage of funded state and local government pension liabilities
Sales tax-backed municipal bond issuance

Percentage of funded state and local government pension liabilities
Sales tax-backed municipal bond issuance

Percentage of funded state and local government pension liabilities
Sales tax-backed municipal bond issuance

Percentage of funded state and local government pension liabilities
Sales tax-backed municipal bond issuance

Then there is the federal debt.

Legalists of both political parties are not concerned with the growing federal deficit in recent years. It has ticked every year since President Trump took office, thanks to increased spending on defense, programs approved by Congress, and rising medical and social security costs. Adding to the deficit this year: $ 2.2 trillion in government incentives.

The good news is that some economists and policymakers believe that federal debt is a concern for lower interest rates than during the previous recession. Nevertheless, large losses mean higher interest payments, which have quadrupled over the last two decades, according to the Congressional Budget Office. Even after the epidemic-related expenses are exhausted, the deficit is set to be kept low to cover the rising costs of social security and major health programs, such as entitlements.

Write Shane Shiflett on Shane. [email protected]

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