Domestic Private Sector of U.S. Economy (2)

• Eventually, private sector starts to expand

  • Firms and households start to draw down savings and take on debt

  • Private sector starts running a deficit

    • "Irrational exuberance"

• Credit crunch

  • Firms and households stop taking on new debt

  • Economy goes into recession

• Private sector's tendency to go into deficit precedes recessions ...

  • ... and during recessions private sector fights to get back into surplus