Hi, good day. Thank you for your article. Every time you post something I am looking forward to reading it.
May I ask you how you have constructed the «Total stock of bank-related private sector credit» chart from FRED? I may have asked you about this before, but I didn’t manage to replicate it. You said something about using «Loans and leases in Bank Credit: All Commercial Banks» and applying some changes. If you don’t want to share I respect that.
It's mostly "total loans & leases" but it has been adjusted historically for changes in categorisation over history. I can't remember all the changes I've made over time so I can't even recreate it.
Also on similar lines Chinese Debt to GDP has grown over the years. Private sector debt especially household sector has been exacerbated but now mortgage debt is falling. Why has China's economy defied conventional economics of a recession/financial trouble when such rapid increase in debt happens. And is that outcome still a possibility?
Short answer is that they carefully control the provision of debt even when there are issues in that particular asset class, while growing debt that is directed to other sectors to make up for the growth shortfall.
Western banking systems are far more autonomous and tend to quickly restrict the availability of credit to a problem sector, exacerbating the problem. This may seem like a worse thing to do but there are downfalls to each approach.
Yes provision control can be seen. Loans are evergreened. Chinese banks NIMs have collapsed. It is more like a slow death vs western style of cleaning banks book (which causes a short term shock but lays ground for revival)
Slow death in the form of compounding poor allocation of resources is worse in my opinion, but you could argue for days about where the line is where losses should be socialised.
So how can we know that the process is ending? For eg, in Japan it ended in 1990s with sharp rise in interest rates. While in China it's opposite with interest rates being lowered and economy in deflation. What would you track in such a economy? Even deflation of massive property bubble has not caused any financial trouble yet.
Great article. The yield curve inversion that preceded every US recession since 1950s, would it be wrong this time (as you see stronger growth ahead)? It inverted back in 2022 and the duration is already longest on record.
Yield curve is a bit funny at the moment. There are already cuts priced so we've already passed the step of inversion during the hiking cycle. The next step would be a bull steepening.
If cuts don't materialise the case is still for bear steepening in my opinion. This is spoken about in the "bonds suck" piece linked in the article.
Good piece, thanks. Only question / inconsistency: if the slight dip in credit expansion drove an aggressive slowdown in growth in early 2022, why hasn't the more meaningful and persistent dip in credit expansion through most of 2023 and 2024 driven an even bigger slowdown?
The moving average provided is only a guide and a way to read the charts. The 2022 episode created a much larger gap because of the huge swing in both classes debt to outright contraction rather than just a gradual slowing which is what we saw in 2023.
Another way to visualise it is if you had a much shorter moving average that would've crossed the slower moving average in the charts very quickly.
Wittgenstein’s Ruler “Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.”
Great article Peter. Does the metric consider non-bank lending? Asking since that category has seen considerable growth post GFC (although a good part of it still relies on bank funding).
It doesn't include non-bank lending. I've calculated that it may change the outcome by about 0.2% of GDP over the last few years so I don't think its that meaningful.
Hi, good day. Thank you for your article. Every time you post something I am looking forward to reading it.
May I ask you how you have constructed the «Total stock of bank-related private sector credit» chart from FRED? I may have asked you about this before, but I didn’t manage to replicate it. You said something about using «Loans and leases in Bank Credit: All Commercial Banks» and applying some changes. If you don’t want to share I respect that.
Kind regards,
It's mostly "total loans & leases" but it has been adjusted historically for changes in categorisation over history. I can't remember all the changes I've made over time so I can't even recreate it.
Understood, thank you very much for taking the time to reply. I wish you a blessed day!
https://convex-strategies.com/2024/05/15/risk-update-april-2024-wittgensteins-ruler/
Also on similar lines Chinese Debt to GDP has grown over the years. Private sector debt especially household sector has been exacerbated but now mortgage debt is falling. Why has China's economy defied conventional economics of a recession/financial trouble when such rapid increase in debt happens. And is that outcome still a possibility?
Short answer is that they carefully control the provision of debt even when there are issues in that particular asset class, while growing debt that is directed to other sectors to make up for the growth shortfall.
Western banking systems are far more autonomous and tend to quickly restrict the availability of credit to a problem sector, exacerbating the problem. This may seem like a worse thing to do but there are downfalls to each approach.
Yes provision control can be seen. Loans are evergreened. Chinese banks NIMs have collapsed. It is more like a slow death vs western style of cleaning banks book (which causes a short term shock but lays ground for revival)
Slow death in the form of compounding poor allocation of resources is worse in my opinion, but you could argue for days about where the line is where losses should be socialised.
So how can we know that the process is ending? For eg, in Japan it ended in 1990s with sharp rise in interest rates. While in China it's opposite with interest rates being lowered and economy in deflation. What would you track in such a economy? Even deflation of massive property bubble has not caused any financial trouble yet.
Great article. The yield curve inversion that preceded every US recession since 1950s, would it be wrong this time (as you see stronger growth ahead)? It inverted back in 2022 and the duration is already longest on record.
Yield curve is a bit funny at the moment. There are already cuts priced so we've already passed the step of inversion during the hiking cycle. The next step would be a bull steepening.
If cuts don't materialise the case is still for bear steepening in my opinion. This is spoken about in the "bonds suck" piece linked in the article.
Ray Dalio recently came out with a piece saying that US can suffer heart attack if debt is not dealt with.
On the other hand you have suggested with rising private debt NGDP growth rate would be strong.
Is debt (especially federal debt) an issue in US?
Debt is an issue but so is trying to slow the growth of debt. There is no good outcome.
https://www.bloomberg.com/news/articles/2025-03-26/car-repossessions-surge-americans-struggle-with-auto-loan-payments?srnd=homepage-asia
Car repossessions surge highest since 2009
How do you look at household health in light of such news, stubborn inflation and sentiment index which came poor recently?
Expect the same for mortgages soon, some horrific lending of the last few years will come to cost
Not concerned until investment and private borrowing turns down. Easy to overweight observations and a bit dangerous
Good piece, thanks. Only question / inconsistency: if the slight dip in credit expansion drove an aggressive slowdown in growth in early 2022, why hasn't the more meaningful and persistent dip in credit expansion through most of 2023 and 2024 driven an even bigger slowdown?
Good question
The moving average provided is only a guide and a way to read the charts. The 2022 episode created a much larger gap because of the huge swing in both classes debt to outright contraction rather than just a gradual slowing which is what we saw in 2023.
Another way to visualise it is if you had a much shorter moving average that would've crossed the slower moving average in the charts very quickly.
https://www.jpmorgan.com/about-us/corporate-news/2025/jpmorgan-increases-direct-lending-commitment-to-50-billion
https://www.pymnts.com/bank-regulation/2025/jpmorgan-declines-to-share-private-credit-lending-data-with-regulators/
https://www.wsj.com/finance/investing/abs-crashed-the-economy-in-2008-now-theyre-back-and-bigger-than-ever-973d5d24
https://www.wsj.com/articles/private-credit-eases-off-mega-loan-deals-as-banks-regain-ground-13870e62
https://www.nytimes.com/2024/12/27/business/wall-st-private-credit-money.html
https://www.fsb.org/uploads/P181224.pdf
https://www.barrons.com/articles/banks-alternative-assets-private-credit-0f76bdbd?reflink=desktopwebshare_permalink
Wittgenstein’s Ruler “Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.”
https://substack.com/@thecreditstrategist/note/c-99451512?r=1z5qli&utm_medium=ios&utm_source=notes-share-action
https://open.substack.com/pub/urbankaoboy/p/re-investing-private-credit-and-the?r=1z5qli&utm_medium=ios
Great article Peter. Does the metric consider non-bank lending? Asking since that category has seen considerable growth post GFC (although a good part of it still relies on bank funding).
It doesn't include non-bank lending. I've calculated that it may change the outcome by about 0.2% of GDP over the last few years so I don't think its that meaningful.