Wednesday, September 19, 2018

Too much debt

When debt levels are high, even a small downturn cascades into a deeper one.  Debts can't be repaid because income/cash flow deteriorates.  Companies default on their debt.  Banks have to write off bad loans.  This reduces their free capital and their ability to lend even to sound businesses.  Workers get laid off, and the debt burden increases.  The doom loop continues.

The world has been on a massive spending spree.  Outstanding debts levels have more than doubled.  If there is a significant slowdown in the US, there is a high risk that the world economy will have a recession.


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