This is an abbreviated post from our subscription series at Credit Writedowns Pro. Michael Pettis has a good piece on debt and credit that I ran on the blog this morning. His thoughts on loss socialization are important not just in the context of China but also of other markets like Europe, the US, Canada and Australia where private debt […]
Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity. China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the system by lower nominal GDP growth). Without a massive transfer of wealth from the state sector to the household sector it will be impossible, I would argue, for GDP growth rates of anything above 3-4% – and perhaps even less – to occur without a further unsustainable increase in debt, whether that increase occurs inside or outside the formal banking system and whether or not discipline has been imposed on borrowers.
This is an abbreviated post from our subscription series at Credit Writedowns Pro. Let’s start with the BIS. In general, I defend the BIS view because the BIS is rightly focused on the dangers of over-indebtedness. Gavyn Davies has put a good spotlight on the subject that I think frames the issue well. At the FT, he writes about ‘artificially’ […]
The 2014 BIS Annual Report warns again about the perils of ultra-easy monetary policy as it did in the lead-up to the Great Financial Crisis. I think the BIS could prove a Cassandra here and will explain below. Nevertheless, many refuse to heed its warnings because of the concern with the sluggishness of the real economy in developed economies and the worry about becoming the next Japan. The problem, as the BIS states, is debt. But the answer is not restrictive policy and structural reform as the BIS argues. Rather it is an acceptance of fiscal policy outcomes as mostly endogenous.
Europe’s PMI show a divergence between Germany and France
China’s manufacturing sector is still contracting
The US student debt problem is growing
This is a loaded topic. This entry, however, is not intended to be political. Very few things in economics are good or bad in themselves, but rather can be good under certain conditions or bad under others. I want to try to tease out as logically as I can the conditions under which rising income inequality can be good or bad for the economy.
Unless serious action is taken, Europe in particular (but the U.S. is not far behind) is at risk of falling into a very deep hole from which it may be extraordinarily difficult to dig itself out of. Once in, it will prove ever so hard to get out again. That is one of the key lessons learned from Argentina, even if the nature of Europe’s problems is different from those of Argentina.
There are two potential issues with the current re-leveraging cycle. First, the increase in the latest report, outside of real estate related mortgages as shown in the chart below, was primarily driven by increases in student and auto loan debt. Furthermore, it is important to remember that the demographic shift will also play a key role as the massive “baby boomer” generation moves from “upsizing” to “downsizing.”
Below are seven recent developments in Venezuela’s economy
Yesterday, after some intense industry pressure, US regulators (OCC, FDIC, SEC, etc.) collectively announced that the bulk of the so-called TruPS CDO securities issued prior to May 19, 2010 will be exempt from the Volcker Rule. Let’s take a quick look at the issues around this decision.
By The Brown Brothers Harriman Currency Strategy Team We call attention to four recent items in China: First, central bank deputy governor penned an article yesterday saying that China will expand the opening-up of the foreign exchange market and increase its participation. Second, there has been much talk about new IPOs in China. Third, there was quite a bit of […]
We need to abandon the Loanable Funds model of lending, which treats banks as “mere intermediaries” and therefore ignores them in macroeconomics. the Neoclassical belief in Loanable Funds is the biggest barrier there is to the development of a realistic, monetary macroeconomics. If Paul Krugman gives way on this belief, then maybe there’s hope that central banks and treasuries around the world will eventually do so too.