How Fragile is the U.S. Economy?

Abstract

d ence and expl o re the al t ernatives f a cing the U.S. econom y . On the side of households, heavy indebtedness is putting negative pressure on growth, and debt-service ratios (interest and principal payments relative to income) are close to all-time highs. As we will report later, debt-service burdens appear to have reached saturation levels. Since interest rates are rising, and will continue to do so, households face stark choices. If they continue piling up new debt, the combination of their rising debt burdens and rising interest rates will produce rapidly increasing and unsustainable ratios of debt service to income. A jump in personal bankruptcies and a sharp drop in consumer spending will be inevitable.