Endgame

Borrowing and Spending Like Teenagers

In the run-up to the 2008 recession, American consumers, business leaders as well as politicians abandoned decades-old habits of making difficult choices and putting off gratification. Like a teenager who can’t quite calculate the long-term magnitude of bad decisions, the US spent too much money and saved too little. The nation’s irresponsibility has culminated in an economic game changer: This time the US will not be able to spend its way out of the slump. Instead, it’s in a “balance sheet recession” that may take many years to heal.

This crisis was several decades in the making. The proportion of current total US debt to GDP exceeds the peak reached in 1933 during the Great Depression. Then, US indebtedness – made up of government, business, financial and household borrowings – was three times GDP, but that was largely because the nation’s productivity fell, not because of new debt. In subsequent years, the ratio dropped, but by 2009, liabilities had greatly outpaced productivity. Now debt tops 370% of GDP. This borrowing fuels ultimately unsustainable growth. The final days of the “debt supercycle” ended with the 2008 collapse...