How Excess Debt Leads to Recession

Excess debt leads to recession when the money that is spent to keep an economy growing becomes less and less available as it is used to pay off debt.

Money Contraction

One of the ways that excess debt leads to recession is by causing the money supply to contract. If an individual owes a large percentage of his income to servicing debt, the money being paid to eliminate the debt is removed from the consumer supply.

Additional Borrowing

When excess debt becomes a serious problem, individuals who borrow money to pay off that debt are not putting the money back into circulation. If someone borrows money to pay off a debt instead of buying a new car, fewer new cars are sold, which can cause people to be laid off.

Less Income

When excess debt becomes a problem for an individual or a business, less income is spent on disposable goods and more is spent on eliminating the debt. When less income gets spent, more jobs are lost, leading to the seeds of recession.