Economic Perspective: Is There A Looming Debt Crisis?

MARY WALDEN:

“Today’s program asks if there’s a looming debt crisis. Mike, so far the impact of the recession and high unemployment rates have not hindered the ability of households to make their debt payments, but that could change if lofty jobless rates continue couldn’t it?”

MIKE WALDEN:

“Very definitely, and that’s a big, big worry. The economy is now improving. It’s adding jobs. The current forecast, if the trend that we’ve seen in the last few months continues, is that households will have to write down, that’s a technical term meaning they’re not going to be able to pay, about $800 billion of household debt. Now that sounds like a lot, but it’s actually 50 percent less than the amount that had to be written down during the Great Recession.”

“So if things continue the way they are, and continue to improve the way they are, yes there is going to be some debt loss – households not being able to make those debt payments. That’s going to have to be absorbed by lenders, but it’s going to be much less of a problem than it was during the Great Recession.”

“However, if we get, for example, a second wave of the virus. If we don’t get a vaccine soon, or if the vaccine is not effective, or if not enough people take the vaccine, the worst case scenario that’s been run by economists suggests that about $3 trillion of household debt would have to be written down. That’s an enormous amount of money. That’s much, much more than what occurred during the Great Recession. That would present a major crisis for the financial sector to lose all that money. So we don’t think that’s going to happen, but we’re not out of the woods yet, and it all depends on the virus, the path of the virus, our efforts to contain it and ultimately to beat it.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.