GDP Definition

• Gross Domestic Product is the total value of all the goods and services produced in a country. This means that it is a good rough indicator of economic strength, particularly in relation to previous years. If people are working, doing services for money and producing things, then the GDP will rise and the economy is doing well.
  
  

Private Debt

• Private debt is debt such as credit cards, home loans, auto loans, and any other debt owed by individuals and businesses, who borrow to fuel their growth.
  
  

Implications

• When private debt as a percentage of GDP is large, this means that the GDP is effectively growing because of that private debt--goods and services are being bought by borrowing money rather than being bought with earned money. The larger the ratio, the larger the problem--even people who do not owe any money are still connected to it because the people buying from them and/or employing them are doing so on borrowed money.
  
  What this means is that GDP can grow extremely, yet artificially fast when credit conditions are good and interest rates are low. However, it can do the converse when interest rates rise again because a large portion of private debt means that the entire GDP relies on peoples' access to this credit.