The Private Credit Bubble, and its Pending Collapse

29th November, 2025

The Private Credit Bubble now sits at the center of a financial structure that has grown increasingly fragile since 1971, when the dollar’s final link to gold was severed and monetary discipline was replaced by political discretion.

In the decades since, debt became the primary engine of growth, central banks became the backstop for every downturn, and the illusion of prosperity was maintained by asset markets rising far faster than economic fundamentals.

Investment Consultant and author John Butler, long known for his work on monetary history and the vulnerabilities embedded in fiat systems, has repeatedly warned that the architecture of global finance has drifted into structural imbalance. His recent comments about the escalating risks in the private credit market highlight a broader truth: a system built on suppressed interest rates, leverage, and financialization is entering an environment that no longer supports those conditions.

The private credit market expanded during the era of ultra-low interest rates, attracting investors hungry for yield and companies eager for capital unavailable through traditional banks. But as rates have risen and liquidity has tightened, this once obscure segment of finance has become a systemic risk hiding in plain sight. What seemed like a stabilizing force in corporate lending is starting to reveal itself as yet another pressure point in a global monetary system nearing exhaustion.

The fatalism embedded in this view is not emotional, it is structural. A financial system stretched by decades of credit excess will eventually encounter a limit. And the private credit bubble may be one of the first limits we meet.

What Is Private Credit?

The question “what is private credit?” has moved from specialist jargon into mainstream concern, because private credit now represents one of the largest and least transparent corners of modern finance. Private credit refers to direct lending conducted outside the banking system, typically by private credit firms, asset managers, hedge funds, pension funds, and private equity sponsors. These institutions extend loans to mid-sized businesses, distressed borrowers, and companies unable to secure bank financing.

This system grew rapidly after 2008, when new regulations made banks more cautious about lending to riskier borrowers. Asset managers saw an opportunity to step in, and investors (starved for yield due to low-interest-rate monetary policy) flooded the sector with capital. The private credit market ballooned to around three trillion dollars globally, promising higher returns in exchange for higher risk and lower liquidity.

Unlike bank loans, these credit agreements exist behind closed doors. They rarely trade, lack transparent pricing, and rely heavily on internal valuations determined by the lenders themselves. In a rising-rate environment, this lack of price discovery becomes dangerous. As John Butler notes, opacity provides stability – until it doesn’t. When borrowers struggle, valuations become fiction, and liquidity evaporates without warning.

The very features that fueled private credit’s growth (flexibility, yield, and loosened standards) now form the fault lines through which systemic stress spreads.

The Distortion of Capital Since 1971

The private credit boom cannot be understood without looking at the larger arc of monetary distortion that began in the early 1970s. Once the dollar was freed from gold convertibility, credit creation became untethered from tangible discipline, and the financial sector evolved in response. Debt grew faster than productivity, monetary policy became increasingly interventionist, and asset prices inflated as capital flowed into financial engineering rather than productive investment.

John Butler’s work on monetary history underscores this shift: when money becomes an abstraction, capital allocation becomes distorted. Investors chase yield not because economic conditions warrant it, but because monetary conditions force it. The private credit bubble is one of the clearest expressions of this phenomenon. It is not merely an asset class; it is a symptom of a system that long ago replaced savings with leverage and discipline with expediency.

The environment in which private credit flourished was neither sustainable nor normal. It was the product of a half-century experiment in monetary elasticity. That experiment is now running into its natural limits.

The Quiet Stress Building Inside the Private Credit Market

The private credit market depends on a steady flow of refinancing, optimistic valuations, and a belief that liquidity will always be there when needed. These assumptions are now breaking down. With interest rates rising sharply, many companies financed by private credit cannot roll their debt at these levels. Their cash flows are insufficient, and their business models were built for the era of near-zero rates.

A large portion of private credit loans are floating-rate, which means rising borrowing costs hit borrowers immediately. This is one of the reasons John Butler highlights private credit as a potential trigger point: these borrowers do not have the balance sheet strength to absorb rate shocks, and their lenders do not have access to central bank liquidity i.e., the repo market, when repayment falters.

When stress emerges in traditional credit markets, prices adjust quickly. In private credit, there is no such mechanism. Loans are marked infrequently, usually by the firms that own them. This creates an illusion of stability until defaults force reality to the surface. Then the unwind is sudden. Markets built on opacity tend to stay calm longer, and then break faster.

The early signs of a private credit crisis are already visible. Rising delinquencies. Delayed redemptions. Fund gating. Increasing pressure on private credit firms to extend terms or restructure loans quietly. Add to this a slowing economy and weakening corporate earnings, and the conditions for systemic stress begin to align.

Private Credit vs Private Equity: Understanding the Difference

Though often conflated, private credit and private equity serve different functions in modern finance, and understanding the difference reveals additional risk.

Private equity invests in companies through ownership stakes. It buys businesses, seeks to improve them, and ultimately sells them or takes them public. Returns depend on valuation gains and operational improvements.

Private credit, by contrast, provides debt financing. Private credit lenders extend loans to companies (often companies owned by private equity firms) and earn interest rather than equity returns. These lenders take collateral, not control. Their success relies on the borrower’s ability to make payments, not on the company’s ultimate sale or valuation.

The two sectors have grown increasingly intertwined. Private equity firms often rely heavily on private credit providers to finance their leveraged buyouts. This creates a feedback loop: private equity pushes companies to take on more debt, private credit supplies the leverage, and both sides depend on stable refinancing conditions.

When rates rise and refinancing becomes difficult, the entire structure is threatened. Private equity portfolio companies, already heavily leveraged, struggle. Private credit lenders face defaults. Valuations fall across both industries simultaneously.

The difference between the two asset classes matters less than the fact that they have grown codependent in ways that concentrate risk instead of dispersing it.

The Geopolitical and Macroeconomic Backdrop

The private credit bubble is expanding in a world where the macroeconomic and geopolitical environment no longer supports financial fragility. Inflation remains entrenched. Geopolitical tensions increase. Supply chains realign under strategic pressure rather than economic efficiency. Fiscal deficits explode across Western economies, requiring ever-larger bond issuance just to maintain government operations.

John Butler’s recent comments emphasize that inflation is not a temporary phenomenon; it is the natural outcome of governments attempting to sustain debt-fueled economies through monetary expansion. In such an environment, interest rates cannot sustainably return to the levels that made private credit appear safe. The cost of capital is rising for structural reasons, not cyclical ones.

This is the world in which the private credit bubble must now survive. Higher rates squeeze borrowers. Slower growth erodes revenue. Geopolitical realignments disrupt trade. Government debt competes for capital. And central banks, already stretched by years of intervention, cannot backstop every segment of the financial system.

The private credit market sits exposed.

Why the Private Credit Bubble Matters for the Broader Economy

The private credit bubble is not an isolated anomaly. It links directly into employment, corporate investment, commercial real estate, private equity, and consumer spending. A contraction in private credit lending means fewer refinancing options, more bankruptcies, and more distressed sales. These pressures feed directly into a weakening real economy.

Moreover, the asset bubbles in bonds, stocks, and real estate were all inflated by the same forces that drove the expansion of private credit. They are interconnected expressions of the same long credit cycle. When one fails, the others do not remain untouched, they simply become the next domino.

John Butler has long argued that systems built on artificially low interest rates will ultimately confront a period where accumulated distortions correct simultaneously. Private credit may be the first major fault line to crack, but it is not the only one. It is the canary in a coal mine filled with sovereign debt excesses, inflated asset valuations, and geopolitical volatility.

The collapse of the private credit market will not be the cause of the next recession. It will be the event that reveals the underlying fragility that has been there all along.

Conclusion: The Slow End of an Unsustainable Era

The private credit bubble is not merely a mispriced asset class, it is a reflection of the deeper contradictions embedded in a fifty-year experiment with unconstrained fiat money. Its growth was fueled by suppressed rates, abundant liquidity, and investors forced to chase yield in a distorted landscape. Its unwinding is being accelerated by the return of inflation, the rise of geopolitical risk, and the tightening of monetary policy.

John Butler’s warnings about the structural weaknesses in the global financial system now converge with the data emerging from private credit markets. The signs are not subtle. Defaults are rising. Liquidity is thinning. Borrowers are struggling. Valuations remain artificially high only because pricing is opaque. This is the pattern that precedes broader instability.

When decades of debt accumulation meet the reality of higher rates and slower growth, systems built on leverage begin to fracture. The private credit market is one such system. It is not the start of the crisis but one of its opening chapters.

The long era of financial engineering is ending. The reassessment that follows will reshape the economy far more profoundly than investors and policymakers are prepared for.

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