B1 Intermediate US 9 Folder Collection
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In the last financial crisis household debt was at the very
centre of the storm.
Bad US mortgages and bad mortgage securitisations
forced the entire global financial system into disarray.
This time the crisis is caused by a virus
not by a financial product.
But it is still worth asking whether the $14.3tn in US
household debt might not act as a dangerous accelerant,
making an already serious crisis much worse.
There have been 36m new jobless claims
since the Covid-19 virus took hold of the US economy.
If those translate into waves of defaults
and personal bankruptcies the ripples
will be felt across the world.
But there is some good news.
First, the US government has shovelled billions of dollars
directly into the US economy, cutting cheques directly
to households, supplementing unemployment
insurance, and more.
Second, both borrowers and lenders
seem to have learned some important lessons
since the last crisis.
Household debt relative to household incomes
has come down significantly over the last 10 years.
Falling interest rates have amplified this effect.
Household interest payments relative to household incomes
are not just low; they are at all-time lows.
But there is some less encouraging news as well.
Much of the deleveraging that has
taken place in US households over the last 10 years
has been in mortgages.
Americans owe less on and have more equity in their homes
than they have in years.
But if you take those mortgages out of the picture,
the deleveraging looks much less impressive.
Americans owe only a little less on their credit cards
and against their cars than they did a decade ago.
Even before Covid-19 hit delinquencies on auto loans
and credit card loans were already
rising, as underwriting standards have
fallen as the last crisis has disappeared
into the rearview mirror.
Many of the job losses caused by Covid-19
are in industries like hotels and restaurants
that employ a lot of hourly workers who may not own homes
but are likely to owe money on their cars
and on their credit cards.
Government support should keep these and other workers
current on their debt payments for now.
But eventually, the government's support will stop.
And if the jobs have not returned by then,
there will be a wave of defaults and personal bankruptcies,
the consequences of which we can only guess at.
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Charts that Count: will Covid-19 light the fuse on a debt bomb?

9 Folder Collection
洪子雯 published on May 22, 2020
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