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What_Actually_Happens_if_the_U.S._Economy_Crashes...,..
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00:00In 2008, America suffered its worst economic crash since the Great Depression.
00:05In just a couple of years, nearly $20 trillion in wealth was wiped out, roughly $160,000 per person.
00:13At the time, it was termed a once-in-a-lifetime recession.
00:16Yet in many ways, America's economy today is in an even more dangerous position than at the very bottom of
00:22the 2008 crash.
00:24Total private debt amounts to $42 trillion, almost double what it was before the crash.
00:29Most experts are now putting the odds of a recession in the next year at around 40%.
00:33Not to mention a war in Europe, the fastest interest rate hikes in 40 years,
00:38global tariffs, a president threatening to fire the chair of the Federal Reserve,
00:42and of course, another pending energy crisis in the Middle East.
00:46And yet, after all of this, somehow a recession never seems to come.
00:50In fact, against the odds, the American economy is still growing at a steady 2% per year.
00:54However, for most Americans, consumer sentiment is at its lowest recorded levels in years.
01:00Affordability continues to decline, and credit card delinquency rates are reaching all-time highs.
01:05We've been told that an economic crash is fast approaching.
01:08And yet, for most Americans, it already feels like we're living in one.
01:12Which prompts the question, if this isn't a crash, then how much worse does it have to get?
01:16And what does a real economic crash actually look like?
01:20Okay, so if you were to go onto the internet on any given day,
01:24you would probably see a ton of videos proclaiming China or America or really any other country
01:29is just days away from a crash.
01:32But there's really little agreement on what that actually looks like.
01:35And I think the benefit of hindsight means we often look back on previous crashes,
01:39whether it be the one in 2008 or the 1989 Japanese asset bubble, as one singular moment,
01:47retrospectively flattening out what is really a messy, drawn-out process into a single point in time.
01:52And this means whenever the topic of economic crashes comes up,
01:56people are looking for a singular dramatic event, rather than a slow compounding deterioration.
02:01Typically speaking, a recession is defined as two consecutive quarters of negative GDP growth.
02:07But that definition doesn't actually tell you very much about what's going on.
02:11Take a country like Germany.
02:13By that same definition, it has been in and out of recession for the best part of three years now.
02:18And sure, Germany does have a lot of issues, but if you were to go to the country now,
02:22you would see that it's a long way away from the Great Depression.
02:25That's because what really makes recession so dangerous is less to do with the stock market or monthly GDP figures,
02:31and more because the entire system runs on a kind of collective trust that most people never think about.
02:37Pretty much all the things you take for granted, whether that be your salary or your mortgage,
02:41all depend on a set of assumptions that, if they break, take everything else down with them.
02:46And to understand what that actually looks like in practice,
02:49you first need to understand one of the strangest features of modern economies,
02:53which is something known as fractional reserve banking.
02:56Today, banks are insanely complicated,
02:59juggling everything from high-frequency trading and complex derivatives to global currency swaps,
03:03all to keep the global financial system running smoothly.
03:07But if you were to go back just a few hundred years,
03:09they were actually a pretty simple business,
03:12effectively just existing as a safe place for people to keep their money.
03:15Then around the 17th century, a couple of banks in London noticed that on any given day,
03:20only a tiny fraction of customers ever wanted to take out their cash.
03:23So rather than just letting it sit there, they started lending that very cash out.
03:28Merchants who needed money would come to them.
03:30The bank would then hand over money that technically belonged to someone else,
03:34charge interest on it, and then pocket the difference.
03:37They were essentially running two businesses at once, using the same pile of gold.
03:41And by the later parts of the 18th century,
03:43some banks were giving out up to ten times the amount that they actually had in their savings.
03:48Unsurprisingly, at this rate, it took just a few years for the entire thing to collapse.
03:52Now, this idea of fractional reserve banking isn't really some novel grand reveal that we're only just unearthing,
03:58but it does reveal something odd about the system which we've built our entire economy around.
04:04Which is that a lot of economic growth, especially that of the last 10 to 15 years,
04:08relies on banks giving out money which they know they don't really have.
04:12But that means the moment enough people start to worry that the bank might not be able to pay them
04:16back,
04:17they all rush to withdraw their money at the same time,
04:20effectively guaranteeing their own worst nightmare.
04:22In short, fear itself causes the thing that people were afraid of.
04:26And that's exactly what happened in 2023,
04:29when Silicon Valley Bank collapsed in the space of about 48 hours.
04:33A combination of risky long-term investments and a rapid rise in interest rates
04:38had left the bank sitting on around $15 billion in losses.
04:42And when that became public, depositors pulled $42 billion in a single day,
04:47causing the bank to fail the next morning.
04:49Now, that bank in particular was where roughly half of all US technology and healthcare startups kept their money.
04:55And when it failed, those companies weren't able to access any of it.
04:59Major firms like Roku and Ripple were literally hours away from being unable to pay the people who worked for
05:05them.
05:05So, over the weekend, the US government stepped in,
05:08promising to cover any deposits which would have been lost.
05:11And if they hadn't done that,
05:13they'd estimated that over 190 other banks would have also been at risk of collapsing.
05:18Safe to say it's a pretty fragile system.
05:20But despite that, we've basically stuck with it for a pretty simple reason.
05:24That it allows banks and the businesses they lend to, to make huge amounts of profits.
05:29And that's exactly what's happening today.
05:31Okay, but before we look at that, I wanted to talk about something slightly different.
05:35Now, I've been doing this job of making videos for about two years now,
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05:40But I think there is a bit of a danger when you're doing this full-time and everything lives online,
05:44how you feel kind of directly maps onto how well a video is or isn't doing.
05:50And when you've poured hours of your time into something,
05:52and it doesn't really land the way you hoped, it can feel not great.
05:55And one thing I've found genuinely useful is having someone to talk to that is completely outside of that world.
06:01Someone who doesn't know what a click-through rate is and doesn't care.
06:04And someone who can just give you a fresh perspective on things.
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06:28Among the strikes in Iran, soaring oil prices, shady unemployment figures,
06:33tariffs, and potential defaults in the private credit markets,
06:36one of the main reasons people are worried about America's economy
06:39is the sheer amount of money that is being thrown into AI investments.
06:43Capital investment from big tech companies has nearly doubled from $224 billion in 2024
06:49to $413 billion in 2025.
06:53For now, most of that is being paid for from the enormous piles of cash
06:57that these companies have generated over time.
06:59But that spending is growing so unbelievably fast
07:02that they're increasingly having to rely on borrowed money to fill the gap.
07:06Amazon is already projected to tip into negative free cash flow this year,
07:10and the five largest tech companies collectively borrowed $121 billion in 2025 alone,
07:18more than three times the amount from five years ago.
07:20And of course, the banks that are lending out that money
07:22are themselves lending out deposits that belong to other people
07:26multiplied several times over through the system.
07:29It's only because of the fractional reserve system
07:31that lending of this scale is possible in the first place.
07:34But it also means that if these AI bets fail to turn a profit,
07:37it's not just the companies that will be in trouble,
07:39but the entire network of banks which have collectively poured
07:42hundreds of billions of dollars into the industry.
07:45The Fed's own stability report viewed a shift in AI sentiment
07:49as one of the top risks to the entire financial system,
07:52wanting it could trigger a broader sell-off large enough to cause a major recession.
07:56Now, given how little it's historically taken to trigger these,
07:59it's admittedly somewhat surprising that this hasn't occurred already,
08:02particularly given everything the global economy has been through in the last couple months alone.
08:06With that said, there are some subtle indicators that suggest it might be coming sooner rather than later.
08:12The first obvious warning sign is the fact that credit card delinquencies have exploded,
08:17rising to the highest level since 2008.
08:19And this isn't really surprising.
08:21The cost of groceries is up around 25% since 2020,
08:25and across the 50 largest cities in America,
08:27rents have risen by an average of around 40%.
08:30Since the pandemic, those extra costs have been filled by debt,
08:34which has risen by about $10 trillion.
08:36But that clearly isn't sustainable.
08:38In many ways, for the average American family, the recession is already here,
08:42it just hasn't shown up in the official figures yet.
08:45And at the same time, the financial sector seems to be taking on riskier and riskier bets,
08:50something which you'd only really expect to see if the economy was actually booming.
08:54The hedge fund leverage ratio, which measures the amount funds are borrowing to amplify their risk,
08:59is now at the highest level ever.
09:01That means for every dollar one of these companies owns,
09:04they are borrowing on average nine more.
09:06And these aren't just some small-scale pension managers either.
09:10Between them, they manage over $5 trillion in assets,
09:13which is equivalent to around a sixth of the GDP of the entire United States.
09:17So, in practice, it means that a relatively modest shift in market conditions
09:21could create enormous losses for these funds,
09:24just like what we saw during the 2008 crisis.
09:26Add into the mix the fact that the Iranian war has pushed oil prices
09:30from $71 to over $100 a barrel in a matter of weeks,
09:34and it seems like all of the conditions,
09:36which have historically created major recessions in the past, all seem to be here.
09:40Now, that might make it seem like there is a recession just around the corner.
09:44But even given that, it's important to keep in mind that no two recessions are ever the same.
09:49What they all share, however, is the underlying vulnerabilities which we've just discussed.
09:53So, with all of that in mind,
09:55there are basically three ways which an American recession could actually pan out.
09:58The first way is something that most people are at least vaguely familiar with.
10:02A shock hits, asset prices collapse,
10:05and then the so-called real economy follows somewhere between six months and a year later.
10:10What makes this so deceptive, however,
10:12is that most people assume that the crash is the recession,
10:16but that isn't really the case.
10:17The stock market is effectively a bet on the future state of the economy.
10:21So, at any given moment,
10:22a share price really reflects what millions of investors collectively believe
10:26a company will be worth years from now.
10:28And that means its value can fall sharply,
10:30based purely on a change in expectation,
10:33even if the underlying business hasn't changed at all.
10:35It's exactly what we saw in 2008,
10:38where it wasn't until almost a year after the stock market had initially tanked
10:42that unemployment peaked.
10:44When the recession did actually arrive in the real economy,
10:47it wasn't the falling stock prices that directly caused it,
10:50but rather a fall in consumption.
10:51And when the housing bubble burst,
10:53the construction industry,
10:54which at its peak employed around 7.7 million Americans,
10:58saw unemployment in the sector hit 20%.
11:01Residential construction alone shed nearly 40% of its workforce,
11:05and tradespeople in Arizona, Nevada, and Florida
11:08had their work simply cease to exist overnight.
11:11As those workers stopped spending,
11:13the businesses that depended on their money also started to struggle.
11:17Restaurants, car dealerships, hardware stores,
11:19all seeing their revenues fall,
11:21did the only thing they could,
11:23lay off even more workers.
11:24And that, of course, meant even fewer people had money to spend,
11:27and the whole thing kept feeding itself.
11:29From 2008 to 2009,
11:32the amount of money being spent on consumption
11:34dropped by around $200 billion in real terms.
11:37And at the same time,
11:39these business failures meant that bank loans,
11:41which had looked perfectly secure when the economy was growing,
11:44were now sitting on their books as potential defaults.
11:47That in turn made the banks much less likely to lend out money,
11:50meaning many firms which needed credit to survive the downturn
11:53couldn't get it.
11:54Now, in the case of 2008,
11:56the only way the economy got out of this doom loop
11:58was when the US government stepped in.
12:00But in our current situation,
12:02that might not really be possible.
12:04Which brings us to the second outcome,
12:06a fiscal crisis on top of the recession itself.
12:09Every time the US government has stepped in to rescue the economy,
12:12it has done so by borrowing enormous amounts of money.
12:15And for most of modern history,
12:16that borrowing was extraordinarily cheap.
12:19Partly because the US government debt
12:21was considered the safest asset on the planet,
12:23and investors were so confident in America's ability to pay them back
12:27that they'd accept almost any interest rate.
12:29But today, that isn't necessarily the case.
12:31Interest payments on US government debt
12:33hit roughly $1 trillion last year,
12:36more than the entire defense budget,
12:38and they're projected to keep rising sharply.
12:40Which means the next time that the government needs to borrow
12:43to rescue the economy,
12:44it will be doing so from a much weaker position.
12:47The same $3 trillion emergency stimulus package
12:50that cost $75 billion in interest over a decade in 2008,
12:55and $30 billion in 2020,
12:57would cost $1.35 trillion at today's rates.
13:0218 times more.
13:03And that would create a real risk
13:05of something called a fiscal doom loop,
13:07where the government borrows to stimulate the economy.
13:09And bond markets,
13:10already nervous about America's debt levels,
13:13demand higher interest rates in return.
13:15Those higher rates increase the cost of servicing the existing debt,
13:19which widens the deficit further,
13:20which requires even more borrowing,
13:22which pushes rates higher still.
13:24Each step makes the next one more expensive.
13:26The consequences of this kind of cycle
13:28would stretch far beyond just government finances.
13:31Every part of the economy,
13:33from business credit to mortgages,
13:34is in some way affected by these interest rates.
13:37Take a home worth $400,000.
13:39Thanks to all the interest rate hikes
13:41over the past couple of years,
13:42the cost of a mortgage has already risen
13:44by over $1,000 a month.
13:46If a fiscal crisis were to push mortgage rates
13:48even a couple percentage points higher,
13:51it would do the exact same all over again.
13:53Now, in 2008,
13:55this loop never got started,
13:56because even though the crisis originated in America,
13:59investors around the world
14:00still considered US government debt
14:02the safest place to put their money.
14:04And they actually fled into treasuries
14:06during the crisis,
14:07which had the bizarre effect
14:09of lowering US borrowing costs
14:10at exactly the moment America needed to borrow.
14:13But we don't really know
14:14if the same effect would play out today.
14:16Over the course of 2025,
14:18the dollar has already weakened by 9%,
14:20and the Federal Reserve's own survey
14:22of market professionals
14:23found that foreign divestment from US assets
14:26and dollar depreciation
14:28are now being cited as major risks.
14:31So if a crash were to occur today,
14:33it's far from certain
14:34that the government would have
14:35these same tools to fall back onto.
14:36Now, both of these cases require
14:38something dramatic to happen,
14:40a sudden collapse in asset prices,
14:42or a sharp loss of confidence
14:44in the banking system,
14:45or even an oil crisis
14:47to really set off the downward spiral.
14:49But there's also another possibility,
14:51and something which might actually be
14:53even more damaging.
14:54In the early 1990s,
14:56Japan saw the biggest asset bubble
14:57in the country's history burst.
14:59The government and central bank
15:01intervened just enough
15:02to prevent an acute crisis,
15:04propping up struggling banks,
15:05keeping interest rates near zero,
15:07and supporting companies
15:08that would have otherwise failed.
15:10And it worked.
15:11In the narrow sense
15:12that Japan never really had
15:13its own Lehman moment.
15:15But since then,
15:15the economy has experienced
15:17basically no growth.
15:18Of course,
15:19nobody truly knows
15:20exactly why this is.
15:22But at least part of it
15:23is due to the fact
15:24that after the crisis,
15:25a huge number of what economists
15:26called zombie firms emerged.
15:28These are businesses
15:29that were kept alive
15:30by government support
15:31and cheap credit,
15:32rather than genuine productivity.
15:34which meant that while
15:35employment figures remained high,
15:37the actual productivity
15:38of the economy became stagnant,
15:40which in the long run
15:41might be even more harmful
15:42than any recession.
15:44The worst single-year GDP contraction
15:46since the 1950s
15:47occurred during COVID,
15:49where US GDP fell by around 3.4%.
15:52But if America were to find itself
15:54in a similar stagnation
15:55to what Japan experiences now,
15:58it would leave GDP 6% lower
16:00and income per person
16:018% lower by 2050,
16:03which would be three times
16:05the damage
16:05of the worst recession year
16:06in modern history,
16:08spread so thinly across time
16:09that nobody can point
16:10to when it actually happened.
16:12Wherever you look,
16:13it's difficult to escape
16:14the conclusion
16:14that the American economy
16:16is in a more precarious position
16:17than headline figures suggest.
16:19And at the same time,
16:20nobody can really say
16:22what's going to happen.
16:23As an old joke in economics
16:24that forecasters
16:25have successfully predicted
16:2720 of the last four recessions,
16:29The track record
16:30of economic prediction
16:31is, to put it charitably,
16:33not good.
16:33Take this chart
16:34from the UK's
16:35Office for Budget Responsibility.
16:36Every single line
16:38represents what
16:38their economists predicted
16:40economic productivity
16:41would look like going forward.
16:43And each time,
16:44reality,
16:45the black line,
16:45came in well below
16:46what they expected.
16:47The Federal Reserve
16:48didn't see 2008 coming.
16:51Neither did the IMF,
16:52the World Bank,
16:53or the Treasury.
16:54So trying to say when
16:55or exactly how
16:56the next recession
16:57is going to come about
16:58is almost certainly futile.
17:00With that said,
17:00we do know that
17:01the conditions that have
17:02historically preceded
17:03serious economic downturns,
17:05elevated asset prices,
17:07a government with
17:07limited room for maneuver,
17:09and a genuine external shock
17:11are all in some way
17:12present simultaneously.
17:14That doesn't mean
17:14a crisis is inevitable,
17:16but if history tells us anything,
17:18it's that the question
17:19is not if a recession
17:20is coming,
17:20but when.
17:21If you want to do that,
17:23If you want to do it,
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