Regular readers of this blog will remember some interesting discussions here a few months ago of the dynamics of public debt. The point — which is taught in any graduate macro course, but seldom emphasized in public debates — is that the change in debt-GDP ratios over time depends not just on government deficits or surpluses, but also on growth, inflation and interest rates. In particular, for the US, the UK and many other countries [1], the decline in debt/GDP in the postwar decades is entirely due to growth rates in excess of interest rates, with primary surpluses contributing nothing or less than nothing.
An obvious extension of that discussion is the question, What about private debt? After all, the rise in private leverage over the past few decades is even more dramatic than the rise in public leverage:
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| Sectoral Debt as Share of GDP, 1929-2010. Click to embiggen. |
So what if you apply the same kind of decomposition to private debt that is done for public debt, and ask how much of the change in sector’s debt in a given period is due to changes in borrowing behavior, and how much is due to changes in interest rates, growth rates, and or inflation? Surprisingly, no one seems to have done this. So Arjun Jayadev and I decided to try it, for household debt specifically, with (IMO) some very interesting results. A preliminary draft of our paper is here.
I’ll have more on the content shortly, but if you’re interested please take a look at the paper. We’re in the process of revising it now, and any comments/questions/thoughts on making it better would be most welcome.