We’re Actually In A Much Better Place Than We Were Before The 2008 Crisis

We’re Actually In A Much Better Place Than We Were Before The 2008 Crisis
Stéphane Renevier, CFA

almost 2 years ago1 min

There's been a ton of worrying economic news lately, but this should help put your mind at rest: US households and businesses’ bank balances – collectively reflected as a percentage of GDP by the dark blue line in the chart above – are actually in pretty great shape. That suggests we’re heading into this challenging period of slowing growth and rising interest rates far better positioned than we have been in the past.

Take the run-up to the global financial crisis as a counterpoint: you can see that American households (the blue area) and companies (the gray) were spending well beyond their means, relying on cheap debt to finance unsustainable lifestyles and business expansion. So when interest rate hikes made loans more expensive, both groups saw their monthly expenses balloon, forcing them to tighten their belts. That brought the growth of the private sector to a halt, ultimately leading the economy to enter a recession and stocks to crash.

But today, the private sector is in much better shape: consumers built record savings during lockdowns, and companies invested in their own shares rather than expansion projects. Put simply, households and businesses now have a cash buffer that should help them cope with economic shocks. So even though rates are rising, and even though indicator after indicator is hinting at a sharp slowdown in economic growth, the private sector and the stock market could end up being more resilient than last time around.

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