The ratio of household debt to GDP spiked up in recent years as investors were lured into borrowing money at artificially low interest rates in order to buy stocks and real estate as a hedge against inflation — in the mistaken belief that the assets would continue to appreciate. The result was an inevitable asset bubble as demand for real assets exceeded supply. Prices were bid up to the point that asset yields were negligible and expected returns were based primarily on future speculative gains from inflation. The financial sector, spurred on by soaring profits and fat bonuses, circumvented lax regulatory controls to expand debt to record levels — ignoring prudent banking standards to include borrowers with bad credit histories — again in the mistaken belief that ever-increasing asset prices would save them from defaults.
There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
