The impact of coronavirus will be worsened by the fact that the world is holding a record amount of debt right now.

In the US, American households have $1.5 trillion more in debt than they held the last time debt levels peaked in 2008.

With these conditions an economic shock can do a lot of damage, as people and businesses don’t have the cash flow to make debt payments.

The markets know all this, so Donald Trump can freak out all he wants. It’s not going to stop a sell off.

This is an opinion column. The thoughts expressed are those of the author.

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There is never a good time for a global pandemic, but this moment is especially bad. And that is because the world is more in debt than it has ever been.

According to a report from the International Institute of Finance the global debt-to-GDP ratio hit 322% in the third quarter of 2019. In developed markets debt hit 383% of GDP. This includes everything from household debt to corporate and sovereign debt.

“Spurred by low interest rates and loose financial conditions, we estimate that total global debt will exceed $257 trillion in [the first quarter of] 2020, driven mainly by non-financial sector debt (now approaching $200 trillion),” said the report.

In these conditions an economic shock can do a lot of damage. Think of it like going into fire season after weeks of drought. Debt itself won’t be the problem, but if there is a significant slowdown debt will exacerbate that problem. It doesn’t matter how low interest rates are if businesses and individuals simply don’t have the cash flow to make debt payments.

So lowering interest rates – which is what policymakers have been doing in the face of any kind of slow down since the financial crisis – may not be that helpful if things really go south.

Meanwhile, President Donald Trump – who has called himself the “king of debt” – seems most interested in keeping confidence up so the stock market doesn’t fall. This is cosmetic. His administration crippled America’s ability to respond to pandemics a while ago, so it’s clear his interest has never been in solving problems like the one coronavirus poses – he just wants everything to seem fine. Debt will make all of that more difficult.

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Down for a count

Americans households are $14.5 trillion worth of debt, according to data compiled by the New York Federal Reserve. That’s about $1.5 trillion more than we were holding the last time household debt peaked in 2008. The biggest chunk of this debt is held in mortgages, then student loans, then auto loans followed by credit cards.

That means that if a significant economic slowdown does come, and people are forced to work less or not at all, they’ll have trouble paying down the debt they owe. We already know that coronavirus is causing massive supply chain disruptions. Manufacturing jobs, especially, depend on factories having every part they need to build what they build. Those parts come from all over the world, especially China. And in China, especially hard hit provinces like Guangdong and Hubei.

If factories can’t open, employees will likely see their hours cut back. For Americans living paycheck to paycheck that could mean the difference between making and missing debt payments. Enough of this kind of household financial strain could slow the entire economy, especially since consumer spending is its brightest spot right now.

“The American consumer really is the firewall between an expanding economy and a recession,” Mark Zandi said, chief economist at Moody’s Analytics told Reuters.

Corporate America has the same problem. In its Financial Stability Report last May the New York Fed noted that “growth in business debt has outpaced GDP for the past 10 years, with the most rapid growth in debt over recent years concentrated among the riskiest firms.”

And Goldman Sachs is predicting that in a worse case scenario corporate earnings – the thing that keeps these debt levels manageable – could actually contract in 2020 due to the coronavirus.

To be clear, there are a wide range of opinions out there about what coronavirus’ impact will be. While the market basically ignored it until this week, there are some economists – even former Fed Chair Janet Yellen – who say it could take the US and the world to the brink of recession.

But even if the spread of the coronavirus is slowed in the next few weeks, there will be parts of the economy that won’t snap back as quickly as others. What’s worse, in a lot of cases these are parts of the economy that were already hurting.

For example, while Trump has credited himself for a renaissance in American manufacturing, the reality is that there has been no such thing during his presidency. For the entire second half of 2019 the Institute of Supply Management, which tracks manufacturing activity, calculated that the sector was contracting. It just barely managed to swing back to growth in January, but the coronavirus’ spread will likely end all that.

According to Deutche Bank, 20% of US inputs are imported from China. Manufacturing businesses are especially dependent on these inputs as part of their supply chains. Once these supply chains are broken, they can take some time to recover.

Foto: Source: Deutsche Bank

The auto industry serves as a good example. Back in 2011 when Japan was hit by the Tohoku earthquake and tsunami the industry’s domestic output fell 60% and took seven to eight months to recover, according to Capital Economics. The rest of the country’s economy bounced back much faster.

In January about 986,000 Americans were employed in motor vehicle parts manufacturing in some way shape or form, according to the Bureau of Labor Statistics. If auto supply chains are broken and factories close for a time, they could see their hours cut back significantly. That, in turn, would make it harder for workers and businesses to pay down their debt pile.

King of debt, king of denial

None of this seems to be concerning the president of the United States, at least not directly. In fact until this week he’s basically been in a state of denial. According to the Washington Post, Trump didn’t want to say much about the coronavirus for fear that it would harm his chances of making another trade deal with China.

Instead of preparing for a crisis he’s been worrying about the stock market. In an effort to keep investor confidence up he’s resorted to his normal nonsense, calling media reporting on the coronavirus “fake news” while his minions on right wing fringe sites bully Dr. Nancy Messonnier, a Center of Disease Control official handling the coronavirus response.

He’s also sent his administration out to tell people to look past the coronavirus. In a CNBC interview this week Economic adviser Larry Kudlow buy stocks.

“The virus story is not going to last forever,” he said. “And that’s why I like the World Health Organization saying, let’s not overreact. To me, if you are an investor out there and you have a long-term point of view I would suggest very seriously taking a look at a market, a stock market that is a lot cheaper than it was a week or two ago. The long-term investor.”

None of this will work, and stocks will continue to stocks slide. For reference, the Dow Jones industrial average is down another 9.5% since Kudlow told Americans to “buy the dip.”

Even if the administration could show some semblance of competence (which it hasn’t) that may only calm things down temporarily. The bad news of coronavirus’ ravages on the economy is only beginning. The market is aware that corporate earnings are going to get hit in a meaningful way going forward, and it knows what everyone’s balance sheet looks like too.