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Consumer debt and financial fragility

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  • Robert Guttmann
  • Dominique Plihon

Abstract

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.

Suggested Citation

  • Robert Guttmann & Dominique Plihon, 2010. "Consumer debt and financial fragility," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(3), pages 269-283.
  • Handle: RePEc:taf:irapec:v:24:y:2010:i:3:p:269-283
    DOI: 10.1080/02692171003701420
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    References listed on IDEAS

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    1. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    2. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The Stability of Large External Imbalances: The Role of Returns Differentials," NBER Working Papers 13074, National Bureau of Economic Research, Inc.
    3. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
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