Readers may know that economist Steve Keen was among the very few that predicted the 2008 crisis. In the video below he briefly recaps his analysis, that it is the level of private debt and not government debt that creates meltdowns. Other analysts such as Richard Vague have come to similar conclusions.
Keen points out that he saw the rise in the private debt to GDP ratio to 170% as a red alert before the 2008 meltdown. I am not sure where he gets his data from, since one chart he displays briefly shows elevated private debt levels to GDP now, but below the 2008 level.
The World Bank shows US private credit, aka debt, to GDP as 198.2% for 2024. That indeed looks seriously bad.
However, Keen mentions only the US and the UK in his talk. The World Bank shows China’s private debt to GDP at end of 2024 as 194.2% The CEIC database depicts China’s level as 199.35% as of end of June 2025 versus 141.25% for the US at the same quarter end. So there seems to be a considerable difference in approaches as to how to run the US numbers, and not so much for China.
In addition, Keen warns, following Minsky and originally Irving Fisher, that debt deflation is what does real damage in recessions and if not arrested, causes depressions. Japan’s now lost three decades is an example of a very attenuated unwind of a massive private debt binge. Japan has been in borderline deflation this entire time.
China is now in deflation. It is also exporting deflation, witness Thailand now experiencing eight months of deflation.
Deflation (falling prices) is not the same as disinflation (a decline in the rate of price increases). Deflation is destructive. The cost of debt rises in real terms in deflation, so bankruptcies and defaults rise. Because wages are sticky, workers are typically fired rather than having lower pay forced on them, which accelerates the economic downdraft. Due to conditions being poor, plus prices being on the decline, consumers tend to hold off on spending, exacerbating the depression.
Recall that in 2008, China played a big role in blunting the severity of the global shock by engaging in massive stimulus. That does not seem like a likely action now.
In case you doubt this grim forecast, that China looks at least as likely to generate a crisis as the US, consider this section of a new post from China Economic Indicator that we also have in Links today:
The CEI’s 2025 Fixed Asset Investment (FAI) Report exposes the fracture. Growth in this critical indicator, accounting for two-fifths of GDP, has decelerated to 3.8%, pulled down by the continuing seizure of its historic engine: real estate, where investment shrank by 2.1%. The state’s counter-cyclical response is visible in a 6.4% surge in infrastructure spending, yet this stimulus is applied with unprecedented caution, hemmed in by a colossal $9 trillion debt overhang in local government financing vehicles (LGFV).
This presents the core dilemma: China’s growth remains irreducibly tied to capital spending, but the traditional channels are either broken, in the case of property, or saturated and debt-laden, as with traditional infrastructure. The intended pivot is toward manufacturing, in particular high-tech and green sectors like EVs, which shows resilience at 5.2% growth. However, this sector still comprises only 28% of total FAI—not enough to counteract the downdraft from real estate’s decline. Every percentage point of FAI growth now represents a struggle between the gravitational pull of a debt-fueled past and an ambitious but perilous climb toward a more sustainable future.
The Human Cost: A Converging Employment Crisis
The faltering investment engine has a direct and devastating human consequence: structural unemployment. The symbiosis that once defined China’s model—where relentless FAI acted as a sponge for millions of migrant workers and graduates—is breaking down. As real estate contracts and infrastructure spending becomes more targeted, its job-creating power diminishes. The manufacturing investment that remains is increasingly automated and high-skilled, failing to absorb those displaced from construction and traditional industries.
The result is a dual-engine failure. Youth unemployment is estimated at over 25%—see CEI’s Unemployment Report 2025—with severe regional disparities hitting the old industrial northeast. This convergence of weak investment and entrenched joblessness fuels a deflationary vortex: overcapacity in traditional industries pushes prices down, while weak employment depreses consumer demand from the other side. While deflation is in China is not the heart attak it is Western economies, where it can lead to capital flight that can devastate entire secors—it does squeeze profit margins which feeds back into investment pressure and makes local governments debt repayments more difficult. It also risks social fracturing, as Tier-3 cities and the northeast become epicenters of both vanishing investment and vanishing jobs.
The Historical Reckoning
This present convergence is the inevitable reckoning of an investment-led model pushed to its limits. The strategy was staggeringly effective, modernizing the nation and lifting hundreds of millions from poverty. Yet, growth based on piling up capital eventually encounters diminishing returns. The debts taken on to fund this building binge—held by local governments, state firms, and households—now poses a significant financial risk. The model has also created profound imbalances, evident in vacant apartments and industrial overcapacity that depresses global prices. Most critically, it has crowded out the household sector, leaving consumer spending anaemic at roughly 38% of GDP, compared to about 70% in the U.S., and making the economy dangerously lopsided.
It’s surprising to see this post omit that China has had to admit that its manufacturing-driven strategy is hitting a wall in two sectors in which China has global leadership: electronic vehicles and solar panels. In both, it has overcapacity to the degree that both are suffering from destructive price competition that national government has launched a program to try to rationalize those sectors. Mind you, the global car industry is also in a crisis of excessive capacity, which makes the challenge for China even worse. From PlutoniumKun in an early December post:
IMO the biggest problem the automotive industry is facing is not Chinese competition in itself, but a consistent build up of debt and overcapacity over the past 3 decades resulting from a belief that market growth worldwide, combined with economies of scale, would allow a small number of big brands to dominate…
This is exacerbated by numerous countries encouraging the process to develop national champions – it’s not just the US, Europe, China, Japan – countries such as Malaysia, Thailand, Brazil, South Africa, Indonesia, etc., all have their car manufacturing ambitions and have invested hugely in trying to compete – although nobody can match the staggering level of overinvestment in China…
But China is in very big trouble over its industry. The overcapacity has to be seen to be believed, and to make it worse, they have hugely overinvested in highly automated plants which give little financial scope to roll back production when needed. Every region and province of China has its own local champion, and will willingly get into unsustainable debt to keep them producing. Something like 40% of Chinese brands are directly owned and financed by local government investment vehicles – in other words, the buck stops with the local tax payer. There will not be a pretty outcome, unless somehow Beijing can come up with another few tens of millions of willing car buyers every year.
As to quality – Chinese cars have struggled with this, despite the comments made above. Their ICE vehicles are still way behind the best worldwide. Even with EV’s, while they can make them cheaper, this is not the same as being able to win market share in foreign markets. European EV buyers want Renault 5’s and Hyundai Insters and Teslas – regular ‘best of’ lists put Chinese brands well down the list. BYD and MG make the most attractive cars for non-Chinese markets, but this is through deep discounting – its unlikely they are making much money. There are many rumours that BYD is in deep trouble. Berkshire Hathaway exited BYD ownership for a reason.
So even though the extremely visible dependence of what passes for growth in the US on AI bubble blowing is an obvious economic/market risk, evidence is accumulating that the many-decades success of China holding off a day of reckoning with its export/investment driven model is hitting its limits. Batten down the hatches.
Just as a point of comparison – at its peak, just before its crash, Japan’s debt to GDP level was 217%. Many countries, including the US and China, are at or very near this point.
One core reason why Keen (and other non-mainstream economists) were right, is that he, along with MMTers and others such as Michael Pettis, Matthew Klein, Dominik Leusder, and the late Joan Robinson, along with most economic historians reject the classical/neoclassical assumption that since every debt has a credit to balance it, then private debt is largely irrelevant (i.e. the loanable funds fallacy). This is why mainstream economists nearly always miss Minsky-style crashes. Their models simply don’t allow for it.
Another point – while various sources such as the IMF give what seem like very precise figures for debt ratios, in reality there is a lot of ambiguity, complexity and nuance in their calculations, hence you’ll often find very different figures quoted, usually by people trying to prove one point or another. IMO they should really be considered as ballpark figures – the trend probably matters more than the absolute figure. Another important element which can be very hard to quantify is how much of that debt has created productive capacity, how much is wasted (crypto, tulips) and how much has created future liabilities (fancy bridges to nowhere).
With regards China’s debt – many think its even higher than the quoted figures, due to the opacity of their banking system and the variety of creative ways Chinese companies can avoid reporting real debt. As one example, BYD ‘officially’ has a debt load of a manageable 27 billion yuan, but its policy of issuing promissory notes to suppliers means that some consider the real debt may be more than 10x this level (it seems nobody outside the company really knows). And BYD might well be the least opaque of major Chinese private sector companies. In reality, ‘unofficial’ forms of debt are rampant in China and its anyone’s guess as to how much it all adds up to.
Another point – its not just China in Asia that has huge internal debt loads – ROK and Taiwan and other developed and developing Asian nations have huge private debt loads and, arguably, un-popped housing and property bubbles. Europe, in comparison, looks quite good, as private debt has been largely constrained since the last crash, even in France (its debts are mostly public, not private). Of course, this tight approach to debt has led to lower growth, which may not look like such a bad thing in the longer run if Keen is right, and he probably is.
On the general point, it is probably good to distinguish the risks in China compared to the US/UK. The Chinese government has a near total control and ability to shore up its banks and systems by pushing it from balance sheet to balance sheet, albeit at the expense of future ‘real’ growth and employment. That said, they have been reduced to ordering banks to give loads to SOE’s simply to allow them to cover late payments, which sounds a bit like an end game to me. But all in all, it does seem much more likely that it is the US/UK which will crack first, not least because it seems to me that a lot of monied people quite like the idea of a crash, as it furthers opportunities for looting.
Crack First is just another name for Smiley Poker …. accounting just obfuscates the agend/s – endgame …
How does the possibility of debt forgiveness change the expected outcomes for China’s economy?
Debt forgiveness is unthinkable in the West, but the Chinese have already shown that they are comfortable doing that when the situation demands it.
See my comment below.
Chinese have a reputation across Asia of being ruthless businessmen.
How does the possibility of debt forgiveness change the expected outcomes for China’s economy?
Debt forgiveness is unthinkable in the West, but the Chinese have already shown that they are comfortable doing that when the situation demands it.
Xi does not even believe in social safety nets.
And see the New York Times from August:
https://archive.is/qXTU8
In other words, the lenders won’t tolerate having to take losses.
Admittedly this is about personal and not business debt. But China has engaged in rescues of wealth management products (which typically invest in local-government-sponsored projects) rather than have investors take hits.
There is no evidence that I’ve seen of any interest in a Jubilee (MMT) type approach to debt in China – if anything, Beijing seem to take a particularly hard line on debt, both domestic and international. Most debt ‘relief’ given by China internationally has tended to take the form of extended loans, not actual relief. Xi personally is known to be a hardliner on this.
Even if there was to be some sort of large scale relief, it does not address the underlying issues – massive mal-investment and an inadequate local taxation system, meaning that much government investment and support is ultimately based on land values. If China was preparing for some type of balance sheet jiggery pokery (i.e. shifting debts onto the national balance sheet and paying it off to itself) then it would simultaneously have to address its overall local level spending and tax raising system, which it has singularly failed to do.
As far as anyone can tell, Beijings belief is that somehow a great technological and productivity leap will solve all debt problems. Maybe it will in the long term (most economically successful countries have gone through a painful series of crashes before achieving ‘developed’ status) – but right now, the short to medium term problems are becoming critical.
Fair point. Chinese policymakers may be learning some of the wrong lessons from Polanyi…
This article isn’t only about China, but it’s another viewpoint related to the subject being discussed:
https://www.cadtm.org/The-BRICS-are-the-new-defenders-of-free-trade-the-WTO-the-IMF-and-the-World
“On the financial front; the final declaration of the Rio summit (July 2025) reaffirms the central role of the IMF and the World Bank. The BRICS+ nations restrict themselves to advocating for better representation of developing countries without challenging the structural adjustment policies, imposed debts, or the neoliberal orientation of these institutions. Regarding trade, BRICS+ members support the World Trade Organisation (WTO), which has been effectively paralysed since the US blockade initiated by Donald Trump in 2017. They underscore its legitimacy and aim to position it at the core of the global trading system, yet fail to address its detrimental effects on local economies, social rights or the environment.”
It’s amazing how the dominate economic thought is so blind. Their theoretical models of the economy basically ignore money, yet money and accounting is what makes the whole economy function. When you realize that it’s credit expansion that creates money then the whole thing changes. They assume the net effect of a financial crash/bankruptcy is a transfer between creditors and debtors, but in reality it’s a destruction of money which means you’re effectively removing the fuel from the economic engine. It’s like that Air India flight earlier this year… cutting off the fuel supply to the engines – it doesn’t end well.
And yet they can’t seem to ever figure that out.
>>>economic thought
At the PhD/academic paper level, it’s all driven by rather discrete, entrenched mathematical models—and (arguably) too Newtonian and shockingly naive.
Looking back to my fancy pants uni days, it is rather shocking how rudimentary the topic of money was covered in classes. Maybe things have changed, i doubt it.
Things have not changed that much, espcially at the undergraduate level where I teach. The macro portion of Mankiw’s text is based on ‘loanable funds’ and treats banks as intermediaries.
At the graduate level and beyond, those who don’t use loanbale funds thinking are largely ostracized from academic economic departments and ‘good’ institutional appointments at central banks and other government agencies. There are exceptions, of course. Keen himself has been ousted from several academic positions, iirc.
Will “destruction of money” cause DEFLATION ? Is credit as immortal as the supply of financial assets ?
Will the Long Bond be a good investment ?
I don’t have much to add except than to note that the Chinese have different political tools than are available to other countries. Will they use them as they should? Frankly, I doubt it, but it is a meaningful difference. The advantages of having things codified and made into law very late, if at all, is that if extraordinary circumstances demand it they, in principle, would be able to do it.
Another point is that war may well break out before the crisis triggers a catastrophe. I’m not sure if that’s better or worse for China, but it is a confounding factor.
It might be critical that eu countries have low private debt because they’re not sovereign in euros, and therefore couldn’t save their banks on their own.
It’s worrisome that asia is also in private debt trouble, who would act as the engine to pull us out of a deep recession this time? China exporting at super low prices would not help much.
“furthers opportunities for looting” could not agree more, well said.
Could very well happen in China – they have no shortage of neoclassical economists preaching the standard gospel, which if followed would result in serious pain. On the other hand, they have a higher percentage of economists worth a damn, who might instead prevail. Debt is someone else’s asset, and wealth inequality is quite high… in the abstract the solution is clear, though implementation is anything but. And would require greater government intervention than the Chinese government has been comfortable with for decades. So whether they will overcome these headwinds is anyone’s guess, but I have more confidence in China’s leadership than the US or Europe’s.
Warren Mosler has commented multiple times in the past that he always thought the older Chinese officials had a decent understanding of money and banking, but wondered/worried what would happen when all those Harvard / western educated youth grew into positions of power.
Given the opacity of the AI financial bubble (Patrick Boyle tried to explain), I also have less faith in US business leadership, who at the end of the day will look after their own butts rather than their companies, much less the interests of the country where their HQ sits (whose representatives openly are for sale – legalized bribery!). China has effectively communicated to companies (Jack Ma, who was recently video-ed riding a bicycle solo in China) what happens when their interests diverge from those of their country.
The China AI financial bubble is probably nowhere near as big as in the US, but its still very large, and seems to be well on its way to collapsing.
But as Peter Beattie rightly suggests, a very significant difference is that it is an open question whether, assuming a collapsing bubble, the Chinese state can force upon its capitalist class its proper large share of the burden of a debt jubilee, or planned forced selective negative revaluations of debt (a kind of reorganization on a national level), while no such possibility exists for the U.S.
Isn’t something different though? :/ I didn’t see what Steve sees, even though I recently was looking this up based on past knowledge from Keen, because I was looking at Household Debt to GDP:
https://fred.stlouisfed.org/series/HDTGPDUSQ163N
Something is wrong/different. What does this different type of Private Debt level mean?
That graph is household debt – Keen is using total private debt based on World Bank figures, which includes business and other non-public form of debts.
It does get confusing – there are a lot of different measures out there. Its why its particularly easy in topics like this for individuals to pick and choose the figures that suit their arguments.
Ya but look at 2007/8 on the chart vs today. How are we going to get a deflationary spiral in consumer spending, when it isn’t households that are heavily indebted this time?
That doesn’t make sense.
The composition of Private Debt must matter, right? That must have an effect on what the resulting downturn looks like?
I mean – we can’t have a fresh round of mortgage meltdowns like 2007 onwards, if it isn’t household debt that is the reason for sky high Private Debt, right?
I have no doubt that there will be a downturn – I’m just very confused about what we should expect it to look like – and very confused about folks comparing it to 2007+.
Imo the comparison should be with dot com crash in 2000, with imo 7-10k dot com companies, many with ridiculous valuations given low/no rarnings. Fewer ai firms making/buying billions of chips that become obsolete in 3 years and meanwhile many might not even be used.
I agree the next downturn probably won’t be centered in housing, but many are stressed paying high mortgages, if a household has 2 earners and one loses their job we’ll see defaults.
This is not the correct comparison. I earlier thought as you did but now I know more.
The dot-com bubble was a stock market mania and did not have meaningful debt funding.
The AI bubble is now using more and more debt, both corporate debt and even more so via special funding vehicles.
Debt-fuelled bubbles (see 1929, Japan, 2008) do vast amounts of damage across the financial system when they unwind and risk depressions.
2 Thinks… your chart is only households. Also, while debt to gdp does tell you somethings, it masks the growth in total debt, especially during inflationary periods.
Check out this chart…
https://www.federalreserve.gov/releases/z1/dataviz/z1/nonfinancial_debt/chart/#units:usd
You can ignore the state & fed debt, but it does include business debt.
The other item & I don’t know if Steve deals with it at all because it can be tricky to avoid double counting and such, but Financial Sector debts.
Thanks for the article.
How does this play out in our current tariff adorned economy? Last time around the Smoot–Hawley tariffs appeared to be working until the banking sector collapsed:
Smoot–Hawley Tariff Act https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
But there is no evidence that tariffs are working yet, and America was also much more an export economy back then too.
I’m sitting here debating if I want to go through an AI data center implosion/bailout or a more generalized modern manufacturing depression. Hmmm…
How about both?
After all, much of the West relies on manufactured goods from Asia.
Sure China is headed for a flushing out. There was a time in the US when the country had too many domestic auto makers and now it is down to 4. China and the world can’t consume all of what China is producing. It will have to increase consumption in order to reduce its reliance on exports for growth – but that is a big ask. The question becomes, who takes the bath an how cold is the water, if it can’t mitigate its problems?
The US is in an almost opposite position as China. It is an over-consumer, shown by its continuous trade deficits and growing debt levels. It needs to increase production in relation to consumption while becoming more cost competitive in order to move to balanced trade. The US also risks a falling dollar, increased inflation and higher interest rates to make life even more challenging. What will Fortress America do if it has to rely on imports to maintain its standard of living?
We live in interesting times.
I’ll have to accept at face value the explanations by posters above me why China won’t implement a debt jubilee, and we already know that our misleadership class in the West won’t — they’d rather let the world burn first.
But eventually SOMEONE is going to get Michael Hudson’s message — because all of the alternatives are even worse.
I listened to Keen in summer 2007, sold equities in September/ shorted banks in October. Changed our retirement, I’ll certainly listen to him now. It is puzzling his private debt number is so low.
I’ve been focusing on us margin debt, the 333b growth in the 6 months ending in October (FINRA) pushed that debt and the market to all time highs. It’s just 1,1% of us gdp and wouldn’t move the needle on his chart, but unlike amorphous debt to buy cars, houses or holiday gifts it’s focused on the market and pushed indexes to an all-time high. I first thought when the month after the blowoff tops in dot com and GR bubbles happened the sharp fall in margin debt was smart money getting out, but maybe it’s just that some investors were so much ‘all-in’ that Alyssa down turn forced selling. And imo status quo is not sustainable for such investors because they’re probably paying about 7% on their debt. Bull markets has 2 normally steady sources of funding, 401(k)s and margin debt growth. Imo when the latter stops and even declines things might be unstable.
Imo this affects the real economy. Imo market growth supports the economy and the economy supports the market. Main Street is already in serious trouble and maybe maxed out with debt, if Wall Street goes too things might be unstable.
I am missing something in Keen’s explanation. Credit is part of aggregate demand and aggregate income, but so what? Why is a high debt level problematic? There must be some threshold or constraint that is exceeded for a crisis to occur? Given that debt incurs interest payments, a high debt load only becomes high reliative to income, not government debt. Thus the threshold seems to me to relate to income and it becomes a problem when interest cannot be paid. I do not understand the mechanism by which a crisis is precipitated and how the crisis initially unfolds. If debt has risen to the point where new debt cannot be assumed, there will be a contraction of demand and income. Does this income contraction mean that interest payments become more onerous? If demand contracts, then output can be reduced – if not, deflation occurs? Can anyone explain the mechanism by which Keen’s contention might proceed?
Looking like a collateral problem again, repo market is now $ 12 trillion in size and not all of it is collateralised against Treasuries. See ” Sizing the US repo market ” at the OFR.
Credit is expanding too quickly for speculative reasons and leverage is extreme, I wouldn’t like to be Mr Bessent when this has to be bailed out. No wonder the Fed wants to get back into T Bills, the losses on long term bonds will hurt their credibility even with the fact they don’t have to care about them themselves, and they have to keep funding the gov. all the time.
Please read Hyman Minsky. Also Steve Keen and Richard Vague. Wikipedia should help.
We’re talking about private debt, not government debt, expressed as a % of GDP (i.e.Income), not billions of dollars. Also we’re looking at both levels of debt (stocks) and net new credit (flows).
Experience shows that when you have a rapid acceleration of new credit driving private debt to very high levels, the debt burden ultimately becomes unsustainable and will sooner or later implode, causing bankruptcies, bank failures and general economic mayhem. Keen says this is what caused the Great Depression and the recent Great Financial Crisis.
Mainstream economists tend to ignore credit and debt and therefore cannot understand how the economy works.
The only thing that can save us now is Count Formaldehyde, er Dr. Doom calling for a collapse, he hasn’t been right about anything since 2008~
Wukchumni: The only thing that can save us now is Count Formaldehyde, er Dr. Doom calling for a collapse, he hasn’t been right about anything since 2008~
In that case, be worried. Be very worried.
‘Dr. Doom’ Nouriel Roubini breaks with the crowd on the AI bubble, saying the U.S. is headed for a ‘growth recession’ and not a market crash
https://fortune.com/2025/11/25/dr-doom-nouriel-roubini-says-no-ai-bubble-growth-recession-american-exceptionalism/
Why Wall Street’s Dr. Doom now wants to be Dr. Boom: Nouriel Roubini, who’s been known as “Dr. Doom” for 17 years, is feeling more upbeat.
https://www.businessinsider.com/recession-prediction-dr-doom-us-economy-nouriel-roubini-markets-outlook-2025-6
Yves, what is your comment on Warren Mosler statement (someone nicknamed “Mosler’s Law”) that “There is no financial crisis so deep that a sufficiently large fiscal adjustment cannot deal with it.” and I guess that also includes a potential debt jubilee in the fiscal toolbox.
Nobody really wants to hear it, but have we come to the end of the fiat era?
If things come a cropper, i’m not sure how you resurrect it-confidence in what amounts to ‘free money’ conjured up by the mouse clique being distributed willy nilly isn’t gonna go over all that well.
Hyperinflation is the modern version of a Jubilee, it wipes out debt and wealth in one fell swoop~
For as long as there are governments, someone somewhere will always use fiat, typically in any crisis and most definitely in any war.
We shouldn‘t forget that the Chinese system works a bit differently than here in the West, where there‘s not only an absence of intentional longterm strategies and policies, but a constant back and forth of political factions like a drunken sailor, while the country is passively at the mercy of macroeconomic storms. Things in china are a bit more intentional, aligned and longterm. The central committee and the party organisation is aware of these issues and actively trying to change outcomes, sometimes that works, sometimes it doesn’t. When it doesn’t the plan is adjusted. That‘s called Dialectic Materialism – compare that to the „scientific“ and “empirical” approach of politicians in the EU or US. I don‘t think there’s any other country with so many politicians with an engineering background as in China. So PLEASE start reading the five year plans, that way there’s not so much surprise when china is suddenly leading in e-Cars or solar cells or still has not had the financial crash that finally!! puts it back into the place the west thinks it should be content with. I don‘t say that the next plan，十五五， predicts 100% the future, but to analyse upcoming risk and past lessons you need to read this kind of stuff for China. E.g. deep seek can translate pretty well: https://www.12371.cn/2025/10/28/ARTI1761640401107119.shtml There’s already a lot activity going on for the launch of the 15th 5 year plan in in 2026.
What confuses me about the post and the associated video is the title. I’m not sure I understand how the next crash will be worse than 2008. I don’t think the point is even addressed. Did I miss something?