Private credit and private equity are suddenly everywhere in the headlines, and if you're taking those headlines at face value, the picture looks apocalyptic. I think those fears are significantly overstated — and it really comes down to one critical distinction that almost nobody in mainstream macro-financial media is getting right.
That distinction is the difference between endogenous money — the actual money-creation engine of the banking system — and what private credit is actually doing, which is something fundamentally different.
In this post, we'll walk through exactly what happens on the balance sheets when a private credit transaction takes place versus when bank credit creates endogenous money. Once you see the mechanics side-by-side, it becomes obvious why private credit stress, while real and painful for investors directly exposed, is not the kind of systemic threat that 2008 was — and why the real thing to watch isn't the private credit headlines at all.
The Core Distinction in One Sentence
In a private credit / private equity transaction, no new deposits are created. Existing deposits simply move through multiple layers of the financial system. Claims get stacked on those deposits — new loans, new receivables — but the stock of money in the economy is unchanged.
In a bank credit transaction, new deposits are created on the spot. The banking system expands its balance sheet, and real new money enters the economy.
That's the whole ballgame. Everything that follows — why private credit blowups stay contained, why 2008 was different, and what you should actually be watching — flows from that single fact.
Scenario 1: How a Private Credit Transaction Actually Works
Let's walk through the balance sheet operations. Start with a world where an investor holds a $100 deposit on a bank's balance sheet. It doesn't really matter where that $100 came from — for simplicity, assume it was originally spent into existence by the government.
Now a private equity firm wants to buy a widget factory. They have no cash, so they turn to private credit to bundle investor money. Here's what happens step by step:
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Investor → Private Credit Firm. The investor hands over their $100 deposit in exchange for an IOU (a loan claim that will earn some interest). The deposit moves to the private credit firm. The investor now holds a loan asset; the private credit firm holds a $100 deposit asset and a $100 liability to the investor.
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Private Credit Firm → Private Equity Firm. The private credit firm bundles this money (usually with other investors' money) and lends it to the private equity firm. The deposit moves again. Now the private equity firm holds the $100 deposit, and they owe a $100 loan to the private credit firm. Notice that a second loan claim has been stacked on top of the same original $100 deposit.
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Private Equity → Real Economy. The PE firm finally uses that $100 to buy the widget factory. The deposit ends up with the original owner of the factory, who can now spend it on wages, inputs, or consumption.
At the end of the entire chain, how many dollars of deposits exist? Still $100. The same $100 that existed at the start. What did grow is the tower of claims on that single deposit: the investor's loan claim on the private credit firm, and the private credit firm's loan claim on the private equity firm.
No money was created. Funds were simply shuffled from the investor through two layers of intermediation before finally making it into the real economy.
What Happens When It Goes Wrong
This is where the current headlines come in. If the assets PE bought don't throw off the cash flows expected — and that's precisely what's happening now, with assets being written down — the PE firm can't service the private credit loan. Private credit can't pay back the investor. The original $100 of wealth gets destroyed.
But notice what didn't happen: no money was destroyed, because no money was created in the first place. The losses are contained to the investors and intermediaries in that chain. The banking system's balance sheet was never involved. No bank-created loan-deposit pair is imperiled by any of this.
Scenario 2: How Endogenous Money (Bank Credit) Actually Works
Now let's run a different scenario. Start with a world where there is no money at all. A small business wants to buy a widget machine from a manufacturer. Neither of them has a deposit.
Here's what the bank does:
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The small business asks for a loan. The bank evaluates creditworthiness and decides to extend credit.
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The bank creates the loan and deposit simultaneously. On the asset side: a $100 loan to the business. On the liability side: a $100 deposit for the business. No prior funds were required. No existing deposit was "lent out." The bank simply expanded its balance sheet on both sides at once.
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The business pays the manufacturer. The deposit moves from the business to the widget-machine manufacturer. The business now holds the widget machine; the manufacturer holds $100 in deposits.
At the end of this transaction, how many dollars of deposits exist? $100 — where before there were zero. The money supply expanded. Real new liquidity entered the system.
That deposit can now circulate through the real economy. The manufacturer can pay wages, those workers can buy widgets from the small business, and the small business generates the cash flow needed to pay down the loan. A real business cycle emerges — because new money was created to facilitate it.
The Risk Profile Is Fundamentally Different
Notice what's different here from the private credit scenario: this loan sits directly on the bank's balance sheet. If the small business can't generate enough income to service the loan, the bank eats the loss on its own books. That's how 2008 worked — the housing loans were bank loans. When those assets collapsed in value, bank balance sheets became insolvent. New credit origination froze. The entire endogenous money engine seized up.
In private credit, by contrast, the money engine itself is not the thing under stress.
A Useful Way to Think About It
| Private Credit | Bank Credit | |
|---|---|---|
| New deposits created? | No | Yes |
| Balance sheet expansion? | No (just stacked claims) | Yes |
| Loss location when it goes wrong | Investors, intermediaries | Banks directly |
| Effect on money supply | None | Expansion |
| Effect on broader asset prices | Limited | Significant |
The most important row is the bottom one. Because bank credit expands deposits, it creates the liquidity needed to support higher asset prices broadly. Private credit just reshuffles existing liquidity — at best adding some velocity by mobilizing idle deposits, at worst stacking claims that become unserviceable.
The Connection That Does Exist: NDFI Lending
So are private credit and the banking system completely walled off from each other? Not quite. There's one important channel, and it's worth paying attention to — but it's also worth sizing correctly.
Banks have been growing their lending to non-depository financial institutions (NDFIs) — private credit firms, private equity vehicles, and similar non-bank financial entities. This is how bank-created endogenous money is getting funneled into the private credit ecosystem. It's a real growing part of bank balance sheets, particularly over the last 2–3 years.
This is where private credit losses could theoretically bleed back to the banking system — if the underlying assets collapse enough, eventually the banks holding NDFI loans would take hits on their own balance sheets.
But the Numbers Aren't Close to 2008
Let's put the exposure in perspective.
Heading into 2008:
- About $5 trillion of direct housing-market-related loans on bank balance sheets
- Roughly $11 trillion in off-balance-sheet exposures
- Total bank credit in the system: roughly $9 trillion
- Residuals/capital: around $1.2 trillion
- Ratio: something like 4:1 of housing exposure to capital, with the entirety sitting directly on bank balance sheets
Today:
- About $2 trillion in total NDFI loans outstanding
- Of that, estimates put $500 billion to $1 trillion tied specifically to the private credit / private equity exposure in the crosshairs
- Total bank credit: close to $20 trillion
- Residuals/capital: roughly $2.5 trillion — meaningfully better capitalized
- Plus a structural buffer: in most of these NDFI arrangements, the underlying asset portfolio has to drop 20–40% before the bank takes a markdown. Losses in that first tranche are absorbed by private credit and the investors.
These are not remotely comparable scenarios. The banking system is more capitalized, less exposed in absolute terms, and structurally insulated from the first 20–40% of losses. A 2008-style cascade into bank insolvency requires a much larger shock than what's currently on the table.
What Actually Drives the Macro Economy
Here's the punchline, and it applies far beyond the current private credit story.
What drives the macroeconomy is not the marking-up or marking-down of existing asset valuations. It's the underlying flows of new money creation — either endogenously (through bank credit expansion) or exogenously (through government deficit spending).
As long as new deposits are entering the private sector, the system has the cushion it needs to absorb pockets of wealth destruction like the one we're seeing in private credit. Losses to investors get absorbed; the broader macro engine keeps running.
This is why the single most important thing to watch isn't the private credit headlines at all. It's the fiscal deficit in real terms. As long as real deficits remain positive, new deposits are being added to the private sector. Those new deposits:
- Absorb the wealth destruction happening in private credit
- Cushion bank balance sheets from any NDFI-channel contagion
- Keep the endogenous money engine running by preserving borrower profitability and creditworthiness
If real deficits turn negative — if the government sector becomes a net drag on private sector deposits — then the story changes. That's when isolated losses in a pocket like private credit can start bleeding into the broader macro economy because there's no offsetting flow of new money coming in.
Right now, that's not the scenario we're in, and I don't see it becoming the scenario over the next several months.
The Bottom Line
Private credit and private equity are going to have a rough time. Valuations are getting written down, some investors are going to lose significant money, and there will be real chaos within that part of the financial system.
But from a macro perspective, this is a contained event. The losses sit where they were generated — in a corner of the system that doesn't create money and doesn't sit on bank balance sheets in any meaningful way. As long as fiscal flows keep adding new deposits to the private sector, the broader economy and asset prices outside the directly affected firms should weather this just fine.
The lesson, as always: don't watch the headlines. Watch the flows. Endogenous money creation from bank credit and exogenous money creation from fiscal deficits are what move the macro needle. Everything else is either a consequence of those flows or a sideshow.
Watch the Full Video
For the full walkthrough — including the balance sheet diagrams showing exactly how the deposits move in each scenario — check out the video below: