Consumer debt and financial fragility

This article sheds light on a crucial aspect of the global crisis of 2007-2009: the steady increase of US consumer debt to precipitous levels over a quarter of century. That trend, fed by a combination of macro-economic, demographic, and political factors, intensified greatly in the 2000s when a series of financial innovations allowed American households to draw equity out of their homes while at the same time feeding an unprecedented housing boom. Those same new mechanisms of 'structured' and 'synthetic' finance mobilized a significant and steadily growing proportion of global savings and directed them into this super-bubble as the world's surplus countries came to fund America's debt-financed excess spending for perpetual reproduction of their surpluses. Anachronistic policy preferences among both surplus countries and the US prevented the proper functioning of various adjustment mechanisms before the inevitable financial-fragility dynamic took hold to burst the bubble and throw the global economy into a steep downturn. The persistence of these global imbalances bodes ill for the medium-term stability of the world economy and its recovery potential.