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Public and private debt dynamics

It is interesting to see the debt dynamics over time, looking at private debt (households + non financial corporations) and public debt (government). As you can see public debt over gdp, peaked during 1940’s due to #ww2 and declined due to great productivity and remained relatively stable until the 2000’s, particularly after the #gfc where it started to ramp up to current levels. Private debt on the contrary, has exhibited a mirror image behavior compared to public debt. It bottomed during the Great War, and it has been ramping up until the #gfc, where the great transfer of debt happened. When financial institutions blew up during 2008, the government issue debt to avert the crisis, which was bought by the Fed’s #qe program helping the private sector in its deleveraging process. Currently, the Fed is trying to reduce its balance sheet (qt) but the government is increasing its debt to cover the deficit, while the private sector debt remains stable. The question is, what will happen to both public and private debt if there is a recession: will the lines separate again and will the transfer of debt be from public to private, or will they cross and the government debt continue to increase while the private sector continues its deleveraging?

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Source: Bridgewater Associates

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