Dangers in private debt bubble - ineteconomics.org

March 11, 2018

If you wish to understand the profound risks of private debt in the developed world (and in the Anglosphere in particular), I would recommend reading this excellent paper from the Institute of New Economic Thinking.  https://www.ineteconomics.org/perspectives/blog/the-private-debt-crisis  Here are some excerpts:  

  • One of the key and largely overlooked reasons for this disappointing growth is hiding in plain sight: the increasing global burden of private debt—the combination of business debt and household debt. Even though government debt grabs all the headlines, private debt is larger than government debt and has more impact on economic outcomes. In the United States, total non-financial private debt is $27 trillion and public debt is $19 trillion. More telling, since 1950, U.S. private debt has almost tripled from 55 percent of GDP to 150 percent of GDP, and most other major economies have shown a similar trend. [See Chart 2.] Since GDP is largely the sum of all the spending, and thus income, of households and businesses in an economy, if aggregate private debt to GDP has tripled, that means that average businesses and households have three times more debt in relation to their income. Both private debt and government debt matter, and both will be discussed here, but of these two, it is private debt that has the larger and more direct impact on economic outcomes, and addressing the issues associated with private debt is the more productive path to economic revival.

  • Private debt is a beneficial and essential part of any economy. However, as it increases, it can bring two problems.

    • The first is dramatic. Very rapid or “runaway” private debt growth often brings financial crises. Runaway private debt growth brought the 2008 crisis in the United States, the 1991 crisis in Japan, and the 1997 crisis across Asia, to name just three. And just as runaway debt for a country as a whole is predictive of calamity for that country, runaway debt for a subcategory of debt, such as oil and gas or commercial real estate, is predictive of problems within that subcategory.

    • The second problem it brings is much more subtle and insidious: When too high, private debt becomes a drag on economic growth. It chips away at the margin of growth trends. Though different researchers cite different levels, a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth. When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.

 So what is the Institute of New Economic Thinking.  https://www.ineteconomics.org/

After the Global Financial Crisis George Soros ( https://en.wikipedia.org/wiki/George_Soros ) and global economic leaders (including 3 Nobel laureates in Economics including Jo Stiglitz) came to accept that mainstream economics was broken - because of the lack of ability to foresee the Global Financial Crisis. As a result George and other, formed the Institute of New Economic Thinking ( https://www.ineteconomics.org/  ) to find some better approach to economic thinking to help economists in the future, to solve economic problems better than economists were able to do in the lead up the Global Financial Crisis. Some worthwhile links:

For more discussion on this institute, you could review this reference:  https://www.puzzlefinancialadvice.com/single-post/2017/02/17/Classical-economists-fail-to-foresee-2008-2009-GFC-Austrian-economists-did    




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