There is a strong relationship between the unemployment rate and the percentage of loans which are either delinquent or in default. Between March 21^st and April 11^th which includes the latest available data at time of this article’s publication, over 22 million people have filed initial unemployment insurance claims. This vast increase in unemployment suggest that near-term credit conditions are nearly certain to deteriorate substantially.

Coming into 2020, many important forms of credit including Commercial and Industrial loans and Real Estate loans were indicating some of the lowest rates of credit stress (defaults) since the great recession. Compared to long-term historical levels, consumer loan defaults are near their multi-decade average rate. Consumer loans have experienced a slowly increasing default rate since late 2015 when default rates were below 2%, setting a multi-decade record low.

Unfortunately, automotive loans represent at least one area in which credit stress was of concern even before COVID-19. Automobile loan defaults which have been trending upwards since 2014 were in excess of 5% at the end of 2019; only slightly below the peak default rate experienced from the Great Recession. Given its weak credit situation going into the COVD-19 crisis, the potential deterioration of the auto market may be accelerated and worsened by this pre-existing circumstance.

While governments have the ability to terminate millions of jobs at a time by a pen stroke; the decision to re-hire those lost workers is not performed in the same way. Rather their re-hiring will be decided by many thousands of individual businesses and entrepreneurs. It is a decision that these business leaders will have to justify on their expectations of the future and their ability to spend existing or borrowed cash, with some of that spending not necessarily having an immediate return. In short, the wave of re-employment by its very nature will look different from that which caused the present unemployment. Should credit markets freeze up, it will make an economic rebound that much harder.

Given the unprecedented nature of the current global battle against COVID-19, programs that allow for the suspension of debt payments could play an essential role in mitigating the near-term economic fallout from COVID-19 and help to quicken a future recovery. Major changes that allow for debt payment suspension or rapid credit default forgiveness, as opposed to the normal 7-year rule, will be an important part of bringing the US and global economies back closer to their full potential and full employment.