Debt Crisis

I recently wrote a piece on the world’s economy ... see: World Economic Growth ... in which I predicted that the continued stimulus of many countries’ economies through the generosity of their central banks would not work out well. And today I read that China has been propping up its economy with enormous debt ... see: CNBC Article ... with its total debt at 300% of its GDP.

Now, to me it is understandable that China has dug this hole for itself ... after all it’s new to this capitalism thing ... so it has a lesson to learn about debt. But, what about the rest of the world? It is not our first rodeo! Yet, central banks around the free world are encouraging enormous borrowing with effectively zero interest rates ... or below. What can be wrong with this if this stimulates a vibrant economy?  OK maybe “vibrant” is much too strong a word given that Germany is in an economic contraction with negative half-point interest rates.

So then what are the “dark days ahead” of what I have suggested? Well, it seems obvious to me that, if it costs nothing to borrow money, countries, corporations and people are going to borrow money ... lots of money ... money that they cannot possibly pay back.

This eventually spawns a “debt crisis” which will be a banner headline in the few newspapers that are still publishing when this event occurs. How soon will this occur and what will be the consequence? Boy, I have bitten into a big Pennsylvania hoagie on this question! Honestly, I don’t really know, but I suspect a bit of lunch-meat indigestion will be involved. These events, from the little I have gleaned are a social-psychological phenomena ... where lending logic and rational rules go out the window. ... like they did in the sub-prime mortgage crisis of 2008 ... which actually was the genesis of our current predicament. Somehow large amounts of debt gets erased by the courts and by fiat ... and the lenders generally end up the losers. So, be careful lending money ... but borrowing might not be a bad idea.

Many banks around the world will disappear as will some governments I suspect. Maybe the US will be forced back on the gold standard. But, after a great deal of dislocation and pain, things will normalize and we will start lending and borrowing again. Sorry, that’s all I got at the moment. I’ll muse on it some more later.