Private debt and financial crisis – William Hummel
The overriding importance of private debt and its growth rate as a predictor of a financial crisis has been well documented in recent years.
The latest is by Richard Vague in a very readable book titled The Next Economic Disaster – Why it’s coming and how to avoid it. His analysis shows that for larger countries, “with a 100 percent private debt to GDP and a credit boom, a calamity is probable.
With 150 percent private debt to GDP ratio, a calamity is almost certain.”
Based on a study of many earlier boom -bust episodes, he has determined that a critical credit boom is likely to occur when the growth rate is at 18% or more over a five year period. That amounts to a compound annual rate of about 3.4% per year.
The Federal Reserve Bank of New York reports quarterly on household debt which comprises the principal part of total private debt. The following was copied from a New York Fed site [1]. (note that HELOC is a home equity line of credit.)
Household Debt and Credit Developments as of Q1 2014
| Debt Category | Annual change ($bill) | Total: Q1 2014 ($trill) |
| Mortgage | + 233 | 8.17 |
| Student | + 125 | 1.11 |
| Auto Loan | +81 | 0.875 |
| Credit Card | -1 | 0.659 |
| HELOC | -26 | 0.562 |
| Total | +419 | 11.65 |
It can be seen that the latest annual growth rate was about 3.7%, too high according to Vague, to be safe if it is sustained for five years.
Source: The Understanding Money email network
[1] Data Source: http://www.newyorkfed.org/newsevents/news/research/2014/rp140513.htm
