In recent discussions about economic crises, economist Steve Keen stands out for having accurately predicted the 2008 financial meltdown. In the video below, he summarizes his hypothesis that it is primarily private debt—not government debt—that triggers such disasters. Other experts, including Richard Vague, have reached similar conclusions.
Keen highlights that he viewed the private debt-to-GDP ratio reaching 170% as a significant warning sign prior to the 2008 crisis. While his data presentation includes current elevated levels, those numbers appear lower than those from 2008.
According to the World Bank, by 2024, US private credit will reach 198.2% of GDP, which certainly raises alarms.
However, Keen’s discussion is limited to the US and the UK. The World Bank also projects China’s private debt-to-GDP ratio will be 194.2% by the end of 2024. Data from CEIC shows China’s ratio as 199.35% by mid-2025, compared to 141.25% for the US during the same period. This discrepancy suggests differing methodologies in calculating US versus Chinese figures.
Keen also warns that following the theories of economists like Minsky and Irving Fisher, debt deflation can inflict severe damage during recessions and, if left unchecked, may lead to depressions. Japan’s three decades of economic stagnation is a testament to this aftermath of a significant private debt accumulation. Even now, Japan teeters on the brink of deflation.
Currently, China faces a similar predicament, experiencing deflation and exporting this phenomenon, evidenced by Thailand’s eight months of declining prices.
It’s essential to differentiate deflation (a drop in prices) from disinflation (a slowdown in the rate of price increases). Deflation is detrimental, as it increases real debt costs, leading to more bankruptcies and defaults. Since wages tend to be rigid, companies often resort to layoffs instead of cutting wages, further deepening the economic downturn. This environment, coupled with falling prices, tends to make consumers hesitant to spend, which worsens the economic slump.
It’s worth remembering that during the 2008 crisis, China mitigated the global economic shock through substantial stimulus efforts—an action that seems unlikely in today’s context.
If you doubt this alarming outlook regarding China’s potential for generating a financial crisis akin to that of the US, consider this excerpt from a new post by China Economic Indicator that we’ve shared today:
The CEI’s 2025 Fixed Asset Investment (FAI) Report reveals significant fractures. Growth in this crucial metric, which accounts for two-fifths of GDP, has slowed to 3.8%, primarily due to a persistent downturn in the real estate sector, where investment has contracted by 2.1%. The government’s counter-cyclical measures are evident in a 6.4% increase in infrastructure spending; however, these efforts are vastly limited by an enormous $9 trillion debt burden from local government financing vehicles (LGFV).
This creates a central dilemma: China’s economic progress must rely on capital investment, yet traditional channels for this financing are either broken—like the real estate sector—or overwhelmed with debt, such as conventional infrastructure. The intended shift focuses on manufacturing, especially in high-tech and green sectors like electric vehicles, which exhibit a growth of 5.2%. However, these sectors still account for only 28% of total FAI, insufficient to offset the economic decline triggered by real estate.
The Human Cost: A Converging Employment Crisis
The weakening investment engine has dire human consequences, including rising structural unemployment. The synergy that once characterized China’s economic model—where extensive FAI absorbed millions of migrant workers and graduates—is deteriorating. As the real estate sector dwindles and infrastructure spending becomes more selective, its job-creating capacity declines. The remaining manufacturing jobs are increasingly automated and require high skills, failing to accommodate those laid off from traditional sectors.
This situation has led to a dual crisis. Youth unemployment is estimated to exceed 25%— refer to CEI’s Unemployment Report 2025—with significant regional disparities affecting the traditional industrial northeast. The combination of weak investment and persistent unemployment feeds a deflationary cycle: excess capacity in older industries depresses prices, while weak employment undermines consumer demand. While China’s deflation may not trigger an immediate crisis like in Western economies, where it can lead to capital flight and sector collapses, it still pressures profit margins, intensifying the strain on investments and making debt repayments more challenging for local governments. Moreover, social tensions may rise as Tier-3 cities and the northeast become focal points of declining investments and job opportunities.
The Historical Reckoning
We are witnessing the unavoidable reckoning of an investment-driven model that has reached its limitations. This strategy once effectively modernized the nation and lifted hundreds of millions out of poverty. However, growth achieved through continuous capital accumulation inevitably faces diminishing returns. The debts incurred to support this extensive building spree—held by local governments, state enterprises, and households—now pose considerable financial risks. Furthermore, this approach has created significant imbalances, witnessed by empty apartments and industrial overcapacity that pressure global prices. Critically, it has undermined household consumption, limiting spending to about 38% of GDP, compared to approximately 70% in the United States, rendering the economy lopsided.
Notably, the discussion overlooks that China has confronted challenges within its two leading sectors—electric vehicles and solar panels—due to overcapacity. The exorbitant competition within these markets has prompted the national government to implement strategies to stabilize them. The global automotive industry faces its overcapacity crisis, exacerbating China’s already challenging situation. As outlined by analysts like PlutoniumKun:
The core issue confronting the automotive industry isn’t merely Chinese competition but a longstanding build-up of debt and overcapacity over the past three decades, stemming from the belief that global market growth, combined with economies of scale, would allow a select few large brands to dominate. This situation has been aggravated by countries worldwide seeking to develop national champions—not just the US, Europe, and China, but also nations like Malaysia, Thailand, Brazil, South Africa, and Indonesia—all having invested heavily into their own automotive ambitions. However, no other country can compare to China’s colossal levels of overinvestment.
China’s industry is in significant jeopardy due to this overcapacity. The extent of overcapacity is staggering, and the extensive investment in highly automated plants poses limited flexibility in scaling back production when necessary. Every region and province in China has created its local champions, often accruing unsustainable debt to keep them operational. It is estimated that around 40% of Chinese brands are directly funded and owned by local government investment vehicles, essentially making taxpayers liable. Unless Beijing can significantly increase consumer demand, the outlook remains grim.
Regarding quality, Chinese vehicles have struggled to compete effectively on the global stage. Their internal combustion engine vehicles fall short of international standards, and even in the EV sector, while they can produce more affordable models, they face fierce competition for market share abroad. European EV customers prefer brands like Renault and Hyundai, and despite efforts, Chinese brands often rank lower in ‘best of’ lists. While BYD and MG have produced attractive vehicles for non-Chinese markets, it is largely through deep discounting, which likely limits their profitability. Rumors suggest that BYD may be facing severe difficulties, leading to Berkshire Hathaway’s recent divestment.
Although the visible reliance of the U.S. economy on the fluctuations of the AI bubble presents an evident economic risk, the mounting evidence suggests that China’s long-standing strategy of postponing a reckoning with its export and investment-led growth model is reaching its breaking point. It’s time to prepare for the potential fallout.
