He writes,

I’m talking about the debt of households and firms. And I’m talking long run, not just the last few years. Over the last several decades, the ratio of debt to GDP has increased a lot. Not just in Canada, but in most rich countries, as far as I know. Why?

He proposes some answers, and I lean toward a combination of his (3) and (4), meaning more efficient financial intermediation and also excess growth of the financial sector. My line is that the nonfinancial sector wants to issue long-term, risky liabilities and to hold short-term, riskless assets. The financial sector accomodates by doing the reverse.

The financial sector can have a balance sheet consisting of risky, long-term assets and riskless, short-term liabilities by doing three things: diversifying risk, managing risk (screening out the worst projects, leaning on borrowers to behave), and “faking it” by using signals (ranging from plush lobbies to signs on the door that say “FDIC insured” to winks that suggest “too big to fail”) and counting on creditors to maintain their confidence.

I think that the financial sector has gotten better at all three techniques over the last few decades. But they became particularly good at faking it. That is the story I would tell for the growth of financial intermediation and hence for the growth in private debt. It is a story that is unlikely to have a happy ending.