The Devastating Price of Cheap Debt

Edward Luce has a scary, kaleidoscopic piece in the Financial Times about the crisis of middle-class America. This is a key bit:

What, then, is the future of the American Dream? Michael Spence, a Nobel Prize-winning economist, whom the World Bank commissioned to lead a four-year study into the future of global growth, admits to a sense of foreboding. Like a growing number of economists, Spence says he sees the Great ­Stagnation as a profound crisis of identity for America.

For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that ­property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world's Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.

Read the full story at the FT.

PS: Reminds me of Daniel Indiviglio's article here. In the boom, credit made the poor feel rich. In the bust, debt overhang made the middle-class feel poor. No wonder a consumer revolution is ending with a drawn out period of near-deflation.