A debt bomb is an unstable economic situation that occurs when debts grow large enough to disrupt global economic systems, and, if they are not repaid, there is a reasonable danger of widespread default. Such debts may be built up through excessive government deficits or the extensive and common accrual of debt by individuals, corporations, or banks. An example of a debt bomb is the sub-prime mortgage crisis of 2008, in which homeowner debt unlikely to be repaid was overvalued over the course of several years, creating an unsustainable level of real estate values in the United States. When the true value of these mortgages became clear, many homeowners defaulted on their mortgages and real estate values collapsed, leading to a global recession.
When debt is borrowed and repaid at sustainable levels, it provides economic advantages for borrowers, lenders, and economic systems as a whole. Lenders are able to charge interest and make a profit on the money loaned, while borrowers are able to make purchases and investments that would be impossible otherwise, and economies enjoy increased levels of growth. If debts grow to the point at which a widespread failure to repay them could bankrupt a large number of lenders, however, a debt bomb can result. The collapse of such a system can lead to massive losses for investors, bankruptcy for both borrowers and lenders, and a breakdown in the system of capital exchange that then hampers economic growth.
Debt bombs can be created when the perceived standard of living in a culture is greater than that which the average wage can support. Consumers who are faced with such a disparity may purchase luxury items on credit without having any real means to repay the debt. This is lucrative for creditors in the short term, as they are able to charge interest and late fees on debt for long periods of time after the initial purchases. In the long term, however, it can result in creditors holding large amounts of debt that will never be repaid, which can cripple their own ability to loan money and lead to their own bankruptcy. This kind of standard of living bubble can result when the standard of living in a culture declines without a widely recognized or straightforward cause.
A sovereign debt bomb can occur when a government builds up a national debt that is unlikely to be repaid. In times of natural economic growth caused by natural fluctuations in the global market or demographics, it can be advantageous to take on a large amount of short-term national debt in order to maximize the growth of the economy. If the debt continues to grow more quickly than the economy for a protracted period, sources of credit may dry up as other nations become reluctant to loan more money. This can lead to a situation in which the growth of a nation's economy is slowed by the national debt — which reduces projected tax incomes and the government's ability to repay the debt. This kind of downward spiral can result in an economic crisis for the nation encumbered by debt, as well as nations that hold large amounts of that government's debt.
