Consumers are being overwhelmed by debt, rapidly losing purchasing power and depleting their savings.

Money is the #1 source of fear for Americans.

‍1. Real wages stagnated for 40 years
2. Household debt rose 5x faster than income
3. Housing costs surged 121%
4. 30% of income goes to debt
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Consumer Debt at a Record High

‍The total U.S. consumer debt has now surged to a record-breaking $17.8 trillion (source: Federal Reserve), driven by soaring mortgage balances and a significant rise in credit card debt, which recently surpassed $1 trillion. This debt burden represents a massive financial strain on households, particularly when juxtaposed against stagnant real wages.Key Insight: According to historical economic theory (Minsky’s Financial Instability Hypothesis), when households take on unsustainable levels of debt, it increases the likelihood of an economic crisis. Overleveraged consumers lead to a collapse in spending, which in turn contracts the economy.
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‍Savings Rate Near Dangerously Low Levels

‍The personal savings rate in the U.S. has dropped to a precarious 3.2% (source: Bureau of Economic Analysis), a significant decline from its pandemic-era high of over 30%. A savings rate this low signals that Americans are saving less for future consumption or emergencies, making them vulnerable to economic shocks.Key Insight: According to Keynesian economic theory, consumer spending is the primary driver of GDP growth. When savings rates fall too low, consumers rely more heavily on debt, which increases financial fragility. The savings rate before the 2008 financial crash was similarly low, at 3.6% in 2007, which should raise alarms.
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Wages Stuck in Stagnation

‍Real wages in the U.S. have been stagnant, and in some sectors, they've even fallen when adjusted for inflation. Despite nominal wage growth, the Consumer Price Index (CPI) has eroded purchasing power (source: Bureau of Labor Statistics). This mismatch between income growth and inflation means most Americans are losing ground economically.Key Insight: Wage stagnation and inflation exacerbate inequality, particularly when debt levels are high. According to economic theories like the Phillips Curve, a healthy balance between inflation and wage growth is essential for sustained economic stability. The current imbalance signals a broader issue in household financial health.

Source: Bureau of Labor Statistics, “Real Earnings Summary.”
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The Fed’s 50 Basis Points Rate Cut: Preventing or Delaying a Crash?

‍In September 2024, the Federal Reserve implemented a 50 basis points (bps) cut to interest rates, lowering the federal funds rate to stimulate the economy amid mounting concerns over high consumer debt and stagnant wages (source: Federal Reserve). This move is reminiscent of the Fed's actions leading up to previous financial crises, where rate cuts were deployed to forestall a downturn.Key Insight: From a monetarist perspective (Friedman’s Theory of Interest Rates), lowering rates can ease financial conditions and temporarily prevent a crash by increasing liquidity. However, history suggests that while rate cuts can delay a crash, they don’t always resolve the underlying issues. For example, in 2007, the Fed's rate cuts didn’t prevent the housing bubble from bursting.

Source: Federal Reserve, “Historical Changes in Interest Rates.”
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Parallels with Past Crashes

‍2008 Financial Crisis: Leading up to the 2008 crash, household debt levels were unsustainable, and the personal savings rate had dropped below 5%. Similar warning signs were ignored, including rising debt levels and falling wages. The Fed cut rates multiple times before the crisis, but it wasn’t enough to stop the eventual market collapse.

Source: The National Bureau of Economic Research, “The Subprime Crisis: Cause, Effect, and Lessons.”

Dot-Com Crash (2000): The Fed's rate cuts in 2001 were designed to combat the burst of the dot-com bubble, but the overleveraging of companies and consumers combined with speculative investments masked deeper financial vulnerabilities.

Source: Harvard Business Review, “Understanding the Dot-Com Crash.”
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Can the Fed Avert a Crash This Time?

‍While the Fed's 50 bps cut could buy time, the underlying risks—record debt, low savings, and wage stagnation—remain. The Fed may have acted proactively, but without addressing these structural problems, a rate cut might only postpone a larger crash. As Nobel laureate economist Joseph Stiglitz has noted, "Interest rate cuts are band-aids for deeper systemic issues" (source: Stiglitz, “The Price of Inequality”).

Moreover, the liquidity trap hypothesis (Keynesian theory) suggests that rate cuts are less effective when consumer debt levels are high, as people may be too indebted to borrow more or increase spending. This raises concerns about the long-term efficacy of the Fed's move. Source: Joseph Stiglitz, “The Price of Inequality.”
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‍Conclusion:

‍The Fed’s 50 bps rate cut may have delayed a market crash, but record-high consumer debt, low savings, and stagnant wages suggest deeper issues in the economy. While it's possible the Fed has learned from past crises and is acting ahead of the problem, historical data and economic theory imply that this could merely be a temporary reprieve.
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Additional Sources:
Federal Reserve, Total Consumer Credit Outstanding.
Bureau of Economic Analysis, Personal Saving Rate.
Bureau of Labor Statistics, Real Earnings Summary.
National Bureau of Economic Research, The Subprime Crisis.
Harvard Business Review, Understanding the Dot-Com Crash.
Joseph Stiglitz, The Price of Inequality.