On Monday March 16, the New York Stock Exchange witnessed its worst single-day loss since 1987. The Dow Jones Industrial Average, the United States’ main stock market index, shaved off a historic 2,997 points—a 13 percent loss on the day. As afternoon trading descended into a free fall, President Donald Trump reassured the nation that the “market will be very strong as soon as we get rid of the virus.”
Chief U.S. economist at Oxford Economics, Gregory Daco, had a different take. “We’re calling the recession. We have the three elements to make that call—a profound, pervasive and persistent contraction in economic activity.”
At this point, a recession—or two consecutive quarters of economic decline—seems like a conservative call. But there’s a bigger threat on the horizon: an unparalleled debt crisis.
Coronavirus has brought the world economy to an unprecedented halt. In just over a month, the Dow Jones lost roughly 32 percent of its value. Fearing for the worst, countries have shut their borders, restaurants have closed their doors, education facilities have gone online, and people have begun to practice strict social distancing. The universal shutdown has brought small business and corporations to a standstill. Even New York City Mayor Bill de Blasio warned citizens that the virus will cause economic suffering on par with the Great Depression. Still, while the coronavirus clearly triggered the economic meltdown, it would be an egregious error to solely attribute the economic decline to the virus itself.
Even if the coronavirus had never emerged, the world economy was already on shaky ground, and that, more than anything, explains the dramatic collapse of trading markets amidst the COVID-19 pandemic.
The Great Recession of 2007-2008 resulted from a massive downturn in the housing market. A culture of flipping homes coupled with a lax lending market led to enormous speculation, and eventually, underwrote an economic recession of historic proportions.
As the economy tanked, the government cut interest rates, bailed out failing corporations, and extended tax relief to everyday Americans. The recovery set the foundation for the longest economic expansion in U.S. history. But ironically, it also facilitated a relaxed credit market that has since pumped trillions of dollars into the economy via low-interest loans. High on easy credit, Americans—and the rest of the world—have taken on debt like never before.
Unlike 2008, our current economic crisis is underpinned by multiple debt bubbles including corporate debt, credit card debt, student loan debt, and national debt. When we add these together, it becomes clear that long before the coronavirus made its debut in China, an economic crisis of historic proportions was in the works.
In 2018, amidst a market correction, warning signs began popping up about corporate debt in the U.S., which doubled from $4.9 trillion in 2007 to $9.1 trillion in 2018. During this same time period, the cash-to-debt ratio fell below 12 percent—a record low—indicating that for every $1 of cash, corporations held $8 of debt. Mirroring corporations, individuals have also taken on unequalled amounts of debt in recent years. As of 2020, credit card debt sat at an all-time high of $930 billion—with delinquency rates on the rise. Similarly, student debt is at its highest—reaching $1.5 trillion in 2019. Today, students graduate with an average debt of $29,000.
The U.S. federal deficit has also continued to grow, reaching $22 trillion in 2019. According to the Congressional Budget Office, “other than the period immediately after World War II, the only other time the average deficit has been so large over so many years was after the 2007–2009 recession.” A similar pattern exists at the global level, where debt is more than $247 trillion, or roughly 318 percent of global GDP.
Coronavirus has decimated the world economy, but for the time being, the debit bubble has held. However, as the economy takes a turn for the worse and unemployment rates swing upward, it will become increasingly difficult for individuals and governments alike to keep pace with their payments.
Debt is manageable so long as one’s income continues to keep pace with their monthly payment obligations. This is as true for individuals as it is for corporations and nations. However, as soon as one falls behind on their payments, the entire balance is thrown off as interest begins to accumulate and debt balloons out of control. Ultimately, this is the trap we find ourselves in, and even if the crisis were to end tomorrow, the debt crisis would be irreversible without extraordinary government intervention.