The economy is in a 'rolling financial crisis' as private sector debt balloons, GMO says

• The economy is in a rolling financial crisis, GMO's James Montier said in a recent paper.
• Montier pointed to rising debt in the US, with the ratio of private debt to GDP above 150% for most of the last 20 years.
• That could spell trouble as the US is on the verge of tipping into recession, he warned.

The economy is in the throes of a slow-moving financial crisis thanks to ballooning amounts of debt being racked up in the US private sector, according to GMO. 

"We seem to live in an era of rolling financial crisis. I suspect this is the result of a massive build-up of private sector debt," GMO partner James Montier said in a whitepaper published Monday. "Sometimes these build-ups are accompanied by very high rates of credit growth, giving rise to a credit bubble. On other occasions these builds-ups sit simmering in the background, largely unnoticed until the proverbial s**t hits the fan, when they suddenly act as an amplifier causing a much steeper decline than would otherwise have been the case," he warned.

Montier believed the second scenario describes most financial markets today, with private debt levels ballooning all over the world. But it's at particular risk of happening in the US, he warned, where the ratio of private sector debt to GDP has been north of 150% for most of the last 20 years.

Meanwhile, five-year private credit growth has remained relatively low, which suggests the US isn't yet in a credit bubble.

That mountain of private debt poses a threat to financial stability and to asset prices, especially considering other macro headwinds that are beating down on the economy. Some experts have warned of a recession to soon hit, thanks to high interest rates overtightening the economy.

"Let's imagine the US enters a recession for some reason, something the lead indicators are telling us the US is already experiencing. In this scenario, the cash flows of the private sector are likely to fall significantly, easily turning a run-of-the-mill recession into something far more unpleasant. This is the nature of the systemic risk embedded in our economics today," Montier warned, advising investors to choose assets that hedge against risk and serve as a store of value. 

Other market observers have also warned of a potential crisis to hit the US economy. GMO co-founder Jeremy Grantham has been sounding the alarm on an epic stock market crash. That's because the US has been in a "superbubble" that's now entering its finally stage, Grantham said, estimating the S&P 500 could drop as much as 50% over the next few years.