Private Debt 2012 (1): Looks like thursday is Private Debt day

Some things cannot be said often enough. Excessive private debt is the problem.

From Asymptosis: It’s the Private Debt, Stupid:

While everyone hyperventilates about government debt, they don’t seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt:

This from Steve Keen’s latest.

The red line is private debt. The blue line is government debt.

It should be obvious where the problem lies.


I marked up a copy of Steve Keen's graph to show the "golden age" -- roughly, 1950 to 1970 -- and the years of the "macroeconomic miracle," 1994-2000.

Graph #2: Showing times of "golden" growth

At the start of the golden age, government debt was quite high, about as high as it is today. Private debt, the red line, was very low.

Because private debt was low, people were not burdened with debt. So people were willing to borrow: ready, willing, and able to borrow.

And because people were borrowing a lot, and spending a lot, the private economy grew a lot. That's the reason we had a golden age.

And because the economy grew a lot, the blue line fell a lot. Government debt fell (relative to GDP) because GDP grew at a healthy rate.

(Some people today suggest that we can use inflation to solve the problem of excessive debt. Well, inflation does make the burden of existing debt smaller. But if we are borrowing more during the inflation, we may not reduce the debt problem at all. Look at the decade of the 1970s on the graph. During that inflationary decade, the blue line fell almost not at all. And the red line went up a lot.)

At the start of the golden age, private debt was low. Debt was not a problem. In that era it was common for people to buy a new car -- a new car -- every three years. And still, debt was not a problem.

But we let debt accumulate. The red line went up. And eventually debt did become a problem. Financial costs killed the golden age.

Based on the experience of the golden age, policymakers knew that using credit should be good for economic growth. So policymakers did things to make more credit more available. And policymakers did things to get us using more credit. And the red line went up faster. But the economy still didn't do so well because there was already too much private debt, as a result of using all that credit.

Then in the late 1980s they took away the tax deduction for interest expenses. So the red line went up less quickly, and then turned, and actually came down a little bit. Private debt fell slightly, relative to GDP. The debt burden eased a bit.

And then around 1994, when our debt was relatively low, we felt like a burden had been lifted, and our borrowing started increasing again. The red line went up, really fast this time. And because we were borrowing a lot, and spending a lot, the private economy grew a lot. And once again, the blue line came down.

In the early 1990s the private debt burden fell a little. That's the reason we had the macroeconomic miracle of the later 1990s. But it couldn't last, because the accumulation of private debt was already excessive.


If you want the private economy to grow, you must begin with a low level of private debt. But if you let private debt accumulate, eventually it kills off growth.

We have many policies that encourage the use of credit. We have no policies that encourage the repayment of debt. We let private debt accumulate.

It's a problem.

<- Prev in series Next ->