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Economics 101: Did consumer debt cause the Great Recession?

According to a columnist with the Wall Street Journal’s MarketWatch, the Great Recession was the eventual result of wages for the middle class flattening out around 1980. In the years after, the middle class took on more debt to purchase homes, buy cars and make other purchases.

The columnist wrote that this formula led to economic growth in the United States for a few decades, but it wasn’t sustainable. During the early 2000s, consumer debt doubled and people were unable to service their loans. The credit bubble eventually burst in 2007.

With no other options, many members of the middle class turned to bankruptcy or were forced to foreclose on their homes.

In the years following the Great Recession, economic recovery has been slow, largely because the middle class cut their spending, the columnist wrote.

However, recently consumer debt has one again taken off as Americans begin to turn to credit to finance homes, vehicles and education. While the columnist said that debt isn’t a “sin” or even a bad financial move in some situations, it can cause an economic collapse if uncontrolled.

Additionally, the columnist pointed out that while most economists and officials seem to be focused on the federal debt, greater attention needs to be paid to consumer debt as the middle class is what truly drives the economy.

Ultimately, the columnist said that until wages improve for middle-class consumers, “we’re treating symptoms, not the disease” and can expect to endure a “long period of [economic] stagnation.”

Because there is no indication that incomes will rise for the middle class, debt is a worrisome problem that will continue to affect millions of Americans as they once again begin to rely on heavily on credit for purchases.

The good news, though, is that help is available. For more information on debt settlement and other bankruptcy alternatives, please visit our Kenosha Bankruptcy Alternatives Attorney page.

Source: The Wall Street Journal, "Middle class is drowning in debt, hobbling the economy: Analysis: Without higher incomes, economic stagnation is almost assured," Rex Nutting, June 27, 2014

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