Question

1. COMPARE THE MAGNITUDE OF THE PUBLIC AND PRIVATE DEBT WITH PREVIOUS DEBT CRISIS (Half a page double spacing minimum)

2. WHY THIS COMING ECONOMIC RECESSION COULD CAUSE THE DEBT BUBBLE TO BURST? (Half a page double spacing minimum)

Answer 1

A public debt refers to the total liability of the government that arises from the borrowings of the government to fund various programs of the economy. It is usually an indicator of the health of the government. A private debt is the debt accumulated by the individuals or private business like corporate bond, business loan, credit card etc. In such a case, the credit provider may ask for security over an asset or in the form of guarantee in return for a secured loan. A debt crisis refers to a situation in which the ability to pay back a debt is lost. According to the study by IMF, the private debt as a mix of business debt and housing debt are increasing. In the US, the total non-financial private debt is $27 trillion and the public debt is $19 trillion. The private debt has almost tripled from 55% of the GDP to 150% of the GDP since 1950. Most of the major economies are also found to follow a similar trend. The study says that if aggregate private debt to GDP has tripled, the average business and households have three times more debt in relation to their income. The study also says that private debt has larger impact on the economic outcomes than public debt.

                                    The recession of 2008 was followed by the bursting of the corporate debt bubble. The current economic recession which is caused by the corona virus is expected to cause many debts including the corporate debt, credit card debt, student loan debt etc. A debt bubble is caused because people who are already in debt would take more loans and would result in raised debts. The 2008 financial crisis and recession had also seen the rise of debt bubbles, but the difference is that if it was caused by the housing debt bubble in 2008, now it is the companies that are loading on the debt. This is called as leveraged lending or loans to companies that already have a lot of debt. Thus it will cause this bubble to expand further and will finally cause it to break. When the bubble bursts, the retirement savings would get affected badly. With increasing unemployment and income losses, the debt bubble would expand during the recession time with their mutual funds losing and increasing the bubble further. Thus, this recession would also cause the debt bubble to expand and then burst as it happened in 2008.