Menu Close

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:

Leave a Reply