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„WILL THE NEXT FINANCIAL CRISIS BE
PRIVATE DEBT OR PUBLIC DEBT DRIVEN? “
We had the task to find out what type of financial crisis the world will face next. In order to answer this
question, first of all, we have to explain definitions. The financial crisis can be either public debt or private debt
driven. Public debt, which is sometimes referred to as government debt is all money owed at any given time by any
branch of the government. Public debt accrues over time when the government spends more money than it collects in
taxation.1 Private debt is money owed by households and corporations.2 The last one debt is the most likely to be the
next financial crisis.
To start with, the household debt is one of the debts that threaten economy the most. It can be defined as the
debt that includes home mortgages, auto loans, student loans and credit cards. The household debt rose significantly in
the 20th century as living standards rose. The ratio of household debt to income rose by an average of 39% to 138% in
advanced economies in the last five years.3 Speaking about home mortgages, they are an important problem in the
society. According to the graph Nr.1, the sum of mortgages remains high.4 A lot of people take loans not weighing
their chances to repay them. As it is published in the consumer research (GfK), 21% of people are not confident about
paying off their mortgages.5 What is more, when house prices decline, many people will see their wealth shrink
relative to their debt, and, with less income and more unemployment, they will find it even harder to meet mortgage
payments. For now, mortgage interest rates are rising (graph Nr.2)6 and showing us that the new crisis is coming.
Moreover, talking about auto loans, people are spreading out money and not paying enough attention to their
capabilities. According to the report, made by Equifax, the total value of auto lending jumped nearly 14% and sales of
new cars and light trucks climbed sharply. In the first half of 2012, Americans took out more car loans than they had
since 2007.7 What is about student loans, the total amount of student debt exceeds $1 trillion dollars: $864 billion from
federal funds and $150 billion from private ones. Two thirds of all American students leave the college with a degree
and the average debt of more than $25,000; 30% leave it with the debt but without the degree.8 Finally, speaking about
credit cards, they encouraged a shift from saving to spending. In 2013 American consumers owe $846.9 billion in
credit cards.9 A lot of people are not capable of paying off these debts and because of unpaid bills banks are losing
money. Indeed, there have been practically no structural changes in the financial system after the financial crisis in
