Mainstream macro blames crises on public debt or bad policy.
History tells a different story, The biggest crashes follow private debt booms , when households & firms load up on credit faster than incomes grow.
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History tells a different story, The biggest crashes follow private debt booms , when households & firms load up on credit faster than incomes grow.
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1929, Japan’s 1990s bust, the 2008 GFC, all preceded by surging private debt-to-GDP.
In each case, public debt rose after the crisis, as governments absorbed the fallout.
Cause and effect are backwards in the textbook story.
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In each case, public debt rose after the crisis, as governments absorbed the fallout.
Cause and effect are backwards in the textbook story.
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Private debt booms are dangerous because they fuel asset bubbles and fragile balance sheets.
When cashflows falter or rates rise, defaults spike and leverage turns into a chain reaction.
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When cashflows falter or rates rise, defaults spike and leverage turns into a chain reaction.
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Unlike public debt, private debt must be serviced from incomes that can’t be printed.
When repayment strains hit, spending collapses, dragging the economy down.
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When repayment strains hit, spending collapses, dragging the economy down.
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Minsky called it the “financial instability hypothesis”:
Stability breeds complacency, risk-taking rises, debt loads grow, until the system tips.
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Stability breeds complacency, risk-taking rises, debt loads grow, until the system tips.
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Policy failure #1: ignoring private credit growth in macro models.
DSGE model frameworks treat debt as neutral or irrelevant.
The cycle is driven by leverage, but the models are blind to it.
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DSGE model frameworks treat debt as neutral or irrelevant.
The cycle is driven by leverage, but the models are blind to it.
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Policy failure #2: obsessing over public debt while letting private debt run wild.
It’s the household mortgage bubble, not the deficit, that crashes economies.
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It’s the household mortgage bubble, not the deficit, that crashes economies.
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If you want to prevent crises, track private debt-to-GDP, not just inflation.
The warning signs are always there if you’re willing to look.
Check out all my blogs out on this topic an more on my Patreon:
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patreon.com/c/relearningec…
The warning signs are always there if you’re willing to look.
Check out all my blogs out on this topic an more on my Patreon:
🧵8/8
patreon.com/c/relearningec…
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