My third point is that, for every financial debt there is obviously a corresponding financial asset, owned either by domestic residents or foreigners. There is a lender for every borrower. Net indebtedness, in this sense, is zero by definition. What matters, therefore, is how the debt and assets are matched and how the debt is distributed across the population. If debt is concentrated in households with low liquid financial assets, and high marginal propensities to consume, that is a more vulnerable scenario than if debt is more evenly distributed across the population. I’ll also return to this issue below. Financial cycle And the idea itself of a “financial cycle” is perhaps the best place to start. We are not here talking about the business or economic cycle – that is, the regular “ups and downs” in economic activity we observe in indicators like employment and GDP. By contrast, financial cycles are the persistent and possibly self-reinforcing build up of leverage, increases in asset prices and loosening of credit conditions over time. They don’t always end in tears. But they often do: the peaks of financial cycles tend to be closely associated with financial crises and the possibility of “serious distress and dislocations”.3  2  Although an increase in credit intensity (credit to GDP) is a key part of economic development some studies have found evidence that beyond certain levels of credit to GDP countries experience lower growth. See Cecchetti et al (2011) and Arcand et al (2012). 3  See Borio (2012).

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