mises.org / Frank Shostak / Feb 17, 2017
According to the flow of funds data published by the Fed, the US debt to GDP ratio remains at a lofty level. Non-financial sector debt as a percentage of GDP stood at 251.7% in Q3 2016 against 230.1% in Q1 and 184.3% in Q1 2000.
Consumer credit as a percentage of GDP also remains at a record high — it stood at 19.9% in Q3 2016 against 15.8% in Q1 2000.
Most economic commentators regard these high ratios as alarming. Following in the footsteps of economist Irving Fisher, it is held that a very high level of debt relative to GDP runs the risk of setting in motion deflation and in turn a prolonged and severe economic slump. According to Fisher the high level of debt can trigger the following nine stages of events that culminate in a severe economic slump.1
Stage 1: The debt liquidation process is set in motion on account of some random shock. For instance, a sudden large fall in the stock market. The act of debt liquidation forces individuals into distressed selling of assets.