Debt and Risk Aversion
Our debt has a way of focusing us on downsides, because debt turns a continuous income curve into two discontinuous lines: “solvent” and “insolvent.” More generally, debt has a way of magnifying life events. When things are going well, debt can help them go better: You can buy a house and a car, or you can buy a bigger house and a nicer car. But when things are going badly, debt can turn a slight income loss into a major disaster.
Most Americans now have a lot of debt, whether they’re ordinary workers or commercial landlords. Which means that most Americans have to be extraordinarily sensitive about letting their income cross the line where they can no longer support their debt payments. Which in turn means that already sticky prices may become positively glue-like.
Tags: bubble, college bubble, credit cards, debt, housing bubble, student loans
