Excessive Household Debt as a threat to the US Economy
There are a number of threats to the US economy but one of the biggest is excessive household debt. In fact most of the recent financial problems that the country has suffered have been due to excessive household debt. The problem with too much debt is that it increases the likelihood that people won't be able to pay their bills. This can cause a ripple effect that hurts other parts of the economy.
The main way that excessive household debt is a threat to the US economy is the risk of bankruptcy. If enough people are unable to pay their debts then the banks that loaned them the money are going to suffer the financial lose as a result. This is going to cause a hardship for the banks. In some cases they may actually fail. Even if the bank doesn't fail the money they lose as the result of an increase in bankruptcies would reduce the amount that they have available to lend. With the banks having less money to lend there is going to be less money in the system. That means that there will be fewer products purchased and a slow down in the countries economy.
Even if the banks don't actually lose money too much household debt is going to reduce the amount that the lend. The banks obviously expect to be repaid when they make a loan. In order to protect themselves they limit the amount that they are willing to loan to somebody to an amount that they think the borrower can repay. If there is too much household debt there will be fewer people who the banks are willing to loan to. This will of course reduce the amount that gets lent and inevitably the amount that gets spent.
In most cases household debt is largely made up of mortgages. The problem that this creates is that if the value of somebodies home depreciates they are unlikely to be able to pay off the amount they owe if they sell the house. This means the bank is now in a position where the collateral on that was supposed to protect them in the event that the borrower failed to make their payments no longer does. This is what happened during the recent financial crisis. The banks lent money to people to buy houses. The economy slowed down and a number of these people lost their jobs and were unable to pay their bills. That resulted in the banks having to foreclose only to find that the value of their homes had declined to far less than was owed. This caused large losses for the banks and the inevitable reduction in the amount that they could subsequently lend out. It also led to a situation in which a number of investors were holding investments that were less safe than they thought.