What Actually Happens if the U.S. Economy Crashes

Added: 2026-04-29

[00:00:01]In 2008, America suffered its worst economic crash since the Great Depression. In just a couple of years, nearly $20 trillion in wealth was wiped out, roughly $160,000 per person. At the time, it was termed a once-ina-lifetime recession. Yet, in many ways, America's economy today is in an even more dangerous position than at the very bottom of the 2008 crash. Total private debt amounts to $42 trillion, almost double what it was before the crash. Most experts are now putting the odds of a recession in the next year at around 40%. Not to mention a war in Europe, the fastest interest rate hikes in 40 years, global tariffs, a president threatening to fire the chair of the Federal Reserve, and of course, another pending energy crisis in the Middle East. And yet, after all of this, somehow a recession never seems to come.

[00:00:50]In fact, against the odds, the American economy is still growing at a steady 2% per year. However, for most Americans, consumer sentiment is at its lowest recorded levels in years. Affordability continues to decline and credit card delinquency rates are reaching all-time highs. We've been told that an economic crash is fast approaching. And yet, for most Americans, it already feels like we're living in one. Which prompts the question, if this isn't a crash, then how much worse does it have to get? And what does a real economic crash actually look like? Okay, so if you were to go onto the internet on any given day, you would probably see a ton of videos proclaiming China or America or really any other country is just days away from a crash. But there's really little agreement on what that actually looks like. And I think the benefit of hindsight means we often look back on previous crashes, whether it be the one in 2008 or the 1989 Japanese asset bubble, as one singular moment, retrospectively flattening out what is really a messy drawn out process into a single point in time. And this means whenever the topic of economic crashes comes up, people are looking for a singular dramatic event rather than a slow compounding deterioration.

[00:02:01]Typically speaking, a recession is defined as two consecutive quarters of negative GDP growth. But that definition doesn't actually tell you very much about what's going on. Take a country like Germany. By that same definition, it has been in and out of recession for the best part of 3 years now. And sure, Germany does have a lot of issues. But if you were to go to the country now, you would see that it's a long way away from the Great Depression. That's because what really makes recessions so dangerous is less to do with the stock market or monthly GDP figures. and more because the entire system runs on a kind of collective trust that most people never think about. Pretty much all the things you take for granted, whether that be your salary or your mortgage, all depend on a set of assumptions that if they break, take everything else down with them. And to understand what that actually looks like in practice, you first need to understand one of the strangest features of modern economies, which is something known as fractional reserve banking. Today, banks are insanely complicated. juggling everything from highfrequency trading and complex derivatives to global currency swaps, all to keep the global financial system running smoothly. But if you were to go back just a few hundred years, they were actually a pretty simple business, effectively just existing as a safe place for people to keep their money, then around the 17th century, a couple of banks in London noticed that on any given day, only a tiny fraction of customers ever wanted to take out their cash. So rather than just letting it sit there, they started lending that very cash out. Merchants who needed money would come to them. The bank would then hand over money that technically belonged to someone else, charge interest on it, and then pocket the difference. They were essentially running two businesses at once using the same pile of gold. And by the later parts of the 18th century, some banks were giving out up to 10 times the amount that they actually had in their savings. Unsurprisingly, at this rate, it took just a few years for the entire thing to collapse. Now, this idea of fractional reserve banking isn't really some novel grand reveal that we're only just unearthing. But it does reveal something odd about the system which we've built our entire economy around, which is that a lot of economic growth, especially that of the last 10 to 15 years, relies on banks giving out money, which they know they don't really have.

[00:04:12]But that means the moment enough people start to worry that the bank might not be able to pay them back, they all rush to withdraw their money at the same time, effectively guaranteeing their own worst nightmare. In short, fear itself causes the thing that people were afraid of. And that's exactly what happened in 2023 when Silicon Valley Bank collapsed in the space of about 48 hours. A combination of risky long-term investments and a rapid rise in interest rates had left the bank sitting on around $15 billion in losses. And when that became public, depositors pulled $42 billion in a single day, causing the bank to fail the next morning. Now, that bank in particular was where roughly half of all US technology and healthcare startups kept their money. And when it failed, those companies weren't able to access any of it. Major firms like Roku and Ripple were literally hours away from being unable to pay the people who worked for them. So over the weekend, the US government stepped in, promising to cover any deposits which would have been lost. And if they hadn't done that, they'd estimated that over 190 other banks would have also been at risk of collapsing. Safe to say it's a pretty fragile system. But despite that, we've basically stuck with it for a pretty simple reason. That it allows banks and the businesses they lend to to make huge amounts of profits. And that's exactly what's happening today. Okay. But before we look at that, I wanted to talk about something slightly different. Now, I've been doing this job of making videos for about 2 years now, and I absolutely love it. But I think there is a bit of a danger when you're doing this full-time, and everything lives online. How you feel kind of directly maps onto how well a video is or isn't doing. And when you've poured hours of your time into something and it doesn't really land the way you hoped, it can feel not great.

[00:05:55]One thing I found genuinely useful is having someone to talk to that is completely outside of that world.

[00:06:01]Someone who doesn't know what a click-through rate is and doesn't care and someone who can just give you a fresh perspective on things. This video is a paid advert with Better Help. You take a short quiz, get matched with therapists, and you can communicate however works best for you, whether that be phone, video, or text. And if they're not the right fit, you can switch at any time with no extra cost. Click the link in the description or go to betterhelp.com/invisible hand to get 10% off your first month.

[00:06:29]Among the strikes in Iran, soaring oil prices, shady unemployment figures, tariffs, and potential defaults in the private credit markets, one of the main reasons people are worried about America's economy is the sheer amount of money that is being thrown into AI investments. Capital investment from big tech companies has nearly doubled from 224 billion in 2024 to 413 billion in 2025. For now, most of that is being paid for from the enormous piles of cash that these companies have generated over time. But that spending is growing so unbelievably fast that they're increasingly having to rely on borrowed money to fill the gap. Amazon is already projected to tip into negative free cash flow this year. And the five largest tech companies collectively borrowed $121 billion in 2025 alone, more than three times the amount from 5 years ago.

[00:07:20]And of course, the banks that are lending out that money are themselves lending out deposits that belong to other people multiplied several times over through the system. It's only because of the fractional reserve system that lending of this scale is possible in the first place. But it also means that if these AI bets fail to turn a profit, it's not just the companies that will be in trouble, but the entire network of banks, which have collectively poured hundreds of billions of dollars into the industry. The Fed's own stability report viewed a shift in AI sentiment as one of the top risks to the entire financial system, warning it could trigger a broader sell-off large enough to cause a major recession. Now, given how little it's historically taken to trigger these, it's admittedly somewhat surprising that this hasn't occurred already, particularly given everything the global economy has been through in the last couple months alone.

[00:08:07]With that said, there are some subtle indicators that suggest it might be coming sooner rather than later. The first obvious warning sign is the fact that credit card delinquencies have exploded, rising to the highest level since 2008. And this isn't really surprising. The cost of groceries is up around 25% since 2020. And across the 50 largest cities in America, rents have risen by an average of around 40%. Since the pandemic, those extra costs have been filled by debt, which has risen by about $10 trillion. But that clearly isn't sustainable. In many ways, for the average American family, the recession is already here. It just hasn't shown up in the official figures yet. And at the same time, the financial sector seems to be taking on riskier and riskier bets.

[00:08:50]Something which you'd only really expect to see if the economy was actually booming. The hedge fund leverage ratio, which measures the amount funds are borrowing to amplify their risk, is now at the highest level ever. That means for every dollar one of these companies owns, they are borrowing on average 9 more. And these aren't just some smallcale pension managers either.

[00:09:10]Between them, they manage over $5 trillion in assets, which is equivalent to around a sixth of the GDP of the entire United States. So in practice, it means that a relatively modest shift in market conditions could create enormous losses for these funds, just like what we saw during the 2008 crisis. Add into the mix the fact that the Iranian war has pushed oil prices from 71 bucks to over 100 a barrel in a matter of weeks, and it seems like all of the conditions which have historically created major recessions in the past all seem to be here. Now, that might make it seem like there is a recession just around the corner. But even given that, it's important to keep in mind that no two recessions are ever the same. What they all share, however, is the underlying vulnerabilities which we've just discussed. So with all of that in mind, there are basically three ways which an American recession could actually pan out. The first way is something that most people are at least vaguely familiar with. A shock hits, asset prices collapse, and then the so-called real economy follows somewhere between 6 months and a year later. What makes this so deceptive, however, is that most people assume that the crash is the recession. But that isn't really the case. The stock market is effectively a bet on the future state of the economy.

[00:10:21]So, at any given moment, a share price really reflects what millions of investors collectively believe a company will be worth years from now. And that means its value can fall sharply based purely on a change in expectation, even if the underlying business hasn't changed at all. It's exactly what we saw in 2008 where it wasn't until almost a year after the stock market had initially tanked that unemployment peaked. When the recession did actually arrive in the real economy, it wasn't the falling stock prices that directly caused it, but rather a fall in consumption. And when the housing bubble burst, the construction industry, which at its peak employed around 7.7 million Americans, saw unemployment in the sector hit 20%. Residential construction alone shed nearly 40% of its workforce.

[00:11:06]And trades people in Arizona, Nevada, and Florida had their work simply cease to exist overnight. As those workers stopped spending, the businesses that depended on their money also started to struggle. Restaurants, car dealerships, hardware stores, all seeing their revenues fall, did the only thing they could, lay off even more workers. And that, of course, meant even fewer people had money to spend. And the whole thing kept feeding itself. From 2008 to 2009, the amount of money being spent on consumption dropped by around $200 billion in real terms. And at the same time, these business failures meant that bank loans, which had looked perfectly secure when the economy was growing, were now sitting on their books as potential defaults. That in turn made the banks much less likely to lend out money, meaning many firms which needed credit to survive the downturn couldn't get it. Now, in the case of 2008, the only way the economy got out of this doom loop was when the US government stepped in. But in our current situation, that might not really be possible. Which brings us to the second outcome, a fiscal crisis on top of the recession itself. Every time the US government has stepped in to rescue the economy, it has done so by borrowing enormous amounts of money. And for most of modern history, that borrowing was extraordinarily cheap. Partly because the US government debt was considered the safest asset on the planet. and investors were so confident in America's ability to pay them back that they'd accept almost any interest rate. But today, that isn't necessarily the case.

[00:12:32]Interest payments on US government debt hit roughly $1 trillion last year, more than the entire defense budget, and they're projected to keep rising sharply, which means the next time that the government needs to borrow to rescue the economy, it will be doing so from a much weaker position. The same $3 trillion emergency stimulus package that cost $75 billion in interest over a decade in 2008 and $30 billion in 2020 would cost $1.35 trillion at today's rates. 18 times more. And that would create a real risk of something called a fiscal doom loop where the government borrows to stimulate the economy. And bond markets already nervous about America's debt levels demand higher interest rates in return. Those higher rates increase the cost of servicing the existing debt, which widens the deficit further, which requires even more borrowing, which pushes rates higher.

[00:13:23]Still, each step makes the next one more expensive. The consequences of this kind of cycle would stretch far beyond just government finances. Every part of the economy, from business credit to mortgages, is in some way affected by these interest rates. Take a home worth $400,000. Thanks to all the interest rate hikes over the past couple of years, the cost of a mortgage has already risen by over $1,000 a month. If a fiscal crisis were to push mortgage rates even a couple percentage points higher, it would do the exact same all over again. Now, in 2008, this loop never got started because even though the crisis originated in America, investors around the world still considered US government debt the safest place to put their money. and they actually fled into treasuries during the crisis which had the bizarre effect of lowering US borrowing costs at exactly the moment America needed to borrow. But we don't really know if the same effect would play out today. Over the course of 2025, the dollar has already weakened by 9% and the Federal Reserve's own survey of market professionals found that foreign divestment from US assets and dollar depreciation are now being cited as major risks. So, if a crash were to occur today, it's far from certain that the government would have these same tools to fall back onto. Now, both of these cases require something dramatic to happen. A sudden collapse in asset prices or a sharp loss of confidence in the banking system or even an oil crisis to really set off the downward spiral.

[00:14:49]But there's also another possibility and something which might actually be even more damaging. In the early 1990s, Japan saw the biggest asset bubble in the country's history burst. The government and central bank intervened just enough to prevent an acute crisis, propping up struggling banks, keeping interest rates near zero and supporting companies that would have otherwise failed. And it worked in the narrow sense that Japan never really had its own Leman moment.

[00:15:15]But since then, the economy has experienced basically no growth. Of course, nobody truly knows exactly why this is, but at least part of it is due to the fact that after the crisis, a huge number of what economists called zombie firms emerged. These are businesses that were kept alive by government support and cheap credit rather than genuine productivity. Which meant that while employment figures remained high, the actual productivity of the economy became stagnant, which in the long run might be even more harmful than any recession, the worst single-year GDP contraction since the 1950s occurred during co where US GDP fell by around 3.4%. But if America were to find itself in a similar stagnation to what Japan experiences now, it would leave GDP 6% lower and income per person 8% lower by 2050, which would be three times the damage of the worst recession year in modern history, spread so thinly across time that nobody can point to when it actually happened. Wherever you look, it's difficult to escape the conclusion that the American economy is in a more precarious position than headline figures suggest. And at the same time, nobody can really say what's going to happen. There's an old joke in economics that forecasters have successfully predicted 20 of the last four recessions. The track record of economic prediction is, to put it charitably, not good. Take this chart from the UK's Office for Budget Responsibility. Every single line represents what their economists predicted economic productivity would look like going forward. And each time, reality, the black line came in well below what they expected. The Federal Reserve didn't see 2008 coming. Neither did the IMF, the World Bank, or the Treasury. So, trying to say when or exactly how the next recession is going to come about is almost certainly futile. With that said, we do know that the conditions that have historically preceded serious economic downturns, elevated asset prices, a government with limited room for maneuver, and a genuine external shock are all in some way present simultaneously. That doesn't mean a crisis is inevitable. But if history tells us anything, it's that the question is not if a recession is coming, but when.