Balance Sheet Recession

A balance sheet recession occurs when individuals and businesses prioritize paying off debts over spending and investing, usually after a financial crisis. This focus on debt repayment leads to reduced consumer spending and lower business investment, which can slow economic growth. Unlike a typical recession driven by lack of demand, in a balance sheet recession, the root cause is often excessive debt levels that constrain financial activity. As a result, the economy can remain sluggish for an extended period, even with low interest rates, because people are focused on repairing their financial health rather than engaging in economic activities.