Lenders talk about a “debtor’s death spiral.” It occurs when borrowers get so far in over their heads they begin borrowing money just to cover the interest payments on past borrowings. The borrowers have to do this to keep the lending flowing but they can no longer plausibly pay down the principal. As new debt compounds on old, bankruptcy becomes imminent. Further lending is foolhardy. Foreclosure is only a matter of time.
The U.S. is starting to look like it is entering just such a death spiral. It is foretold not simply by the large and growing deficits, nor by the fact that their carrying costs will rise quickly as interest rates rise. Rather, it is the fact that these trends are becoming irreversible, a structural part of the U.S. economy.
When the ultimate collapse will occur, whether it comes with a bang or a whimper, how it will be triggered, and how severe it will be are as yet unknown. But as Herbert Stein, Chairman of the Council of Economic Advisers under Richard Nixon was fond of saying, “Things that can’t go on forever, don’t.”
| 