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The Next Economic Disaster

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The Next Economic Disaster

Why It’s Coming and How to Avoid It

University of Pennsylvania Press,

15 min read
10 take-aways
Audio & text

What's inside?

Nearly all private-sector credit booms lead to financial crises.

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Editorial Rating

7

Qualities

  • Innovative

Recommendation

In fewer than 100 pages, author Richard Vague sets out to persuade you that the relative and absolute levels of privately held debt within a major economy can predict financial crises. Economic growth always includes the growth of private credit, but periodic booms push the economy out of sync and into crisis. Vague says he’s created an algorithm – not in the book but available online – that can predict these booms and busts, making them preventable. Additionally, he advocates for measures to restructure private-sector loans that would bring borrowers and the economy quickly back to normal after crashes. Though some of his arguments could use greater elucidation and sourcing, and some of his proposals seem contradictory, getAbstract suggests this concise work to those curious about the potential causes and cures of financial crises.

Summary

Focus on Private Debt

While the loud, passionate political debate about “austerity vs. stimulus” rumbles on, the real driving force pulling the strings of national economies gets too little attention. You can find the key to understanding economic turbulence by studying private debt levels.

For instance, take the United States economy. Private debt to GDP has steadily increased in the US since the earliest years of industrialization. As recently as 1950, the US ratio of private debt to GDP stood at 55%. In 1980, it reached 100%; in 2000, it was 133%. In 2008, its peak was 173%, but by 2014 it had retreated a bit to 156%. Mortgage debt, a primary component of private credit in America, “grew from $5.3 trillion in 2001 to $10.6 trillion in 2007, an astonishing doubling in six years.”

Indeed, economic growth has never occurred without the accompanying oxygen of increasing private debt. This fact highlights the reality that private debt nourishes an economy as nothing else can. If you look more closely at the growth patterns of private debt, you can plot its influence in nearly all of history’s major booms and busts. Surges in private credit precede almost all financial...

About the Author

Richard Vague, a former banker, is currently a managing partner of Gabriel Investments and the chairman of the Governor’s Woods Foundation, a philanthropic enterprise.

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