This is a great article on not just how debt has contributed to the recession, but why the recovery is going to be slow. Essential lesson: Get out of debt, and don’t spend more than you make. In fact, the more debt you take out on things like credit cards and student loans, the richer you make the already rich. Also worth noting – while there are systemic issues, pay attention to the end of the article. Without changing our behaviors in regards to debt, we’ll be back in the same position again.

The analysis here is from a billionaire hedge fund manager.

Excerpts below – Why it’s So Slow

Hedge fund billionaire Ray Dalio has a simple way to explain why the economy is so slow. Imagine someone who makes $100,000 a year and has a net worth of $100,000 with no debt. That person can safely borrow about $10,000 a year for several years, meaning they can spend $110,000 a year, even though they only make $100,000. The flip side to all that spending is that someone else is earning $110,000 a year. “For an economy as a whole,” Dalio writes, “this increased spending leads to higher earnings, that supports stock valuations and other asset values, giving people higher incomes and more collateral to borrow more against, and so on.”

But it can only last so long. Eventually, debt service payments take up too much of income, and the tide shifts. “The person spending $110,000 per year and earning $100,000 per year has to cut his spending to $90,000 for as many years as he spent $110,000″ to pay down the borrowing spree, Dalio says. That means someone else can now only earn $90,000.

It’s called deleveraging, and it’s by far the largest reason our economy is so slow.

Some of the debt figures are truly staggering. According to hedge fund manager Kyle Bass, global credit rose from $80 trillion in 2000 to $210 trillion today. In America, household debt rose from $6.5 trillion in 2000 to almost $14 trillion by 2008. As a percentage of disposable income, household debt rose from 59% in 1960 to 130% by 2007.

It all adds up to an incredible amount of consumers like those in Dalio’s example, spending more than they earn, which allows others to enjoy a higher income, which allows even more borrowing, and so on. That created an illusion of prosperity: Without drawing down on home equity loans, the economy would have been in or near recession for most of the last decade.

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Having too much debt is not a psychological problem that can be overcome by animal spirits, and it’s not driven by uncertainty that will be cleared up with new leadership. As Dalio notes, “It is primarily driven by the supply and demand of and relationships between credit, money and goods and services. If everyone went to sleep and woke up with no memories of what had happened, we would all soon find ourselves in the same position.”

None of this is new — it’s well-known that too much debt got us into this recession. But the impact it has on our recovery is less appreciated. If a debt binge caused the recession, and a debt hangover is keeping the recovery tepid, then one of the most important numbers in today’s economy is how long it will be before enough debt is paid off to allow us to get back to normal.