The Private Debt Crisis


The Private Debt Crisis

There’s a Surplus of Worry About Debt


Last time when we read Montier’s report about macro myths, there is a great picture that shows that it is always the appearing of private sector deficit that got us in trouble.

And according to Noah smith’s newest bloomberg view, actually “there continues to be a steady drumbeat of editorials and essays warning about the danger of too much private debt. ” 

For example,


Richard Vague claims that “one of the key and largely overlooked reasons for this disappointing growth is the increasing global burden of private debt—the combination of business debt and household debt.”


Here, he want argue that “when too high, private debt becomes a drag on 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.

As soon as I saw these words, the lowest interest rate in the history jumped into my minds.

But obviously Vague did not dismiss that, “most middle- and lower-income households (which is where the highest rate of debt growth has been), as well as most small- and medium-size businesses, pay interest rates much higher than money market rates. And in addition to interest, all these borrowers have to pay down the principal balance of the loan. Moreover, though their rates may be lower, all of these borrowers are now in a world where increases in income and revenue are harder to come by.”

However, question still exists. China’s recent case shows debt concern make sense, but it looks like a reversing causality: it is the slowdown that draws concern on debt. So does Japan’s case.

Beside of growth,  just like we’ve mentioned, the biggest problem of private debt is “very rapid or “runaway” private debt growth often brings financial crises.”


Given to Vogue, that is because so much lending occurs that it results in overcapacity: “Far too much of something is built or produced—housing and office buildings are two examples—and too many bad loans are made.”

This makes sense if we think about China’s infra investments.

Vogue says “china’s skyrocketing private debt ratio brings a level of overcapacity that makes a continued slowdown in its growth inevitable in order for demand to catch up to a now-staggering oversupply of housing, commodities, and other items.”

And “China is compounding the problem by fully continuing to overlend and overproduce, albeit with diminishing returns. China’s nongovernment loans have grown almost a trillion dollars in the most recently reported period alone, and they are still producing 40 percent more steel than the world needs. In continuing this trend, the Chinese are taking a problem whose size and scope is unprecedented and making it all that much bigger.”

According to this, the world economy is doomed with low growth and deflation.


Japan maybe the future of China, which means a painful deleveraging in private sector balance sheet and a leveraging of government.. After all, governments can always resort to printing money, while households and businesses can’t.

The easiest and most direct way to solve the problem is to cut consumer debt and thus increase consumer spending (or demand) . And the easiest way to cut consumer debt is to lower the interest rate. China still has the potential to accomplish this target, though there are other problems remained in the supply and demand side.

However, Noah’s article doubted about the private debt story .

1.private debt has to be paid back at the individual level, but not in aggregate. Debts net out.

<- If I borrow $100 from my friend Jessica, Jessica borrows $100 from Michael, and Michael borrows $100 from me, none of us is going to have to suffer or cut back when all the debts get repaid.

This is point that Montier also mentioned. Private debt is not a generation problem.

2.In terms of telling when a recession is going to come, it’s likely that the quality of debt is more important than the quantity.

<- It’s indicators of bad debt, like term spreads and the percentage of high-yield debt that predicts.

However, about the debt problem in china, my favourite Chinese analyst Zhang Huaqiao has an idea that lots of debt in china are just failed government spending.

3.If a trend can more or less continue for three centuries, we should be a little wary about claiming that it’s going to end soon.

<- “How much debt is too much? Somehow, most countries have managed to keep their debt numbers growing overall since the dawn of the modern age. What looked like an unthinkably high debt level a century ago looks safely low in 2016. Will current ratios look similarly low to our great-grandchildren?”

4.Short-term debt trends are little changed or declining for most of the major economies




And one can easily get the following conclusion from this graph.

“China’s private debt levels, especially corporate debt, have increased extremely rapidly in recent years. More troubling, the quality of the credit seems to have deteriorated. That signals that a downturn may be in China’s near future.”

Maybe the graph about new economy in china can offer some relief.




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