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Read it at China Financial Markets Building debt
by Michael Pettis
Quality of debt matters as quantity increases.
2 comments:
Ken
said...
Would love to see a good analysis of China from an MMT perspective. I know Warren Mosler writes snippets from time to time, but still hard to grasp the big picture. Some things in the article had me baffled. For example:
"Debt accumulated by companies financing local governments such as Tianjin…is rising"
What does that mean? What is a "company financing local governments"? Is this public or private sector debt he's talking about here?
"The problem, then, is not that there will be defaults. The problem is that the only alternative to default is to service the debt, and this is what will cause the real damage to the economy."
Why will servicing the debt damage the economy?
If the external environment is tough, the demand impact of a sharp drop in investment cannot be made up for by a surge in the trade surplus – in fact the trade surplus may actually contribute negative demand.
How can a trade surplus contribute negative demand?
Wray has some stuff here & there, especially on the hidden fiscal spending through the (formally) bad debts of the banking system. Michael Pettis would call all of them "China Bulls".
Some of those Pettis quotes are hard to understand. I think he means companies buying municipal bonds for the first.
Debt service damaging the economy is pretty screwy. Remind me to get a loan from him. To do a favor to him, I won't repay him, to not damage his economy. As he says, probably rightly, that the debts will be good, be serviced by the central government, then to that extent they are just disguised fiscal spending. He makes some hidden full employment assumptions in order to misunderestimate their economic benefit. If this hidden fiscal spending is needed to get to full employment, has a good "multiplier" total benefit to the economy, then it is a free lunch. It probably is. The resource transfer only comes into play if this fiscal spending is inflationary, a word which doesn't appear in this article.
I have no idea what he is saying about trade surpluses contributing negative demand.
2 comments:
Would love to see a good analysis of China from an MMT perspective. I know Warren Mosler writes snippets from time to time, but still hard to grasp the big picture. Some things in the article had me baffled. For example:
"Debt accumulated by companies financing local governments such as Tianjin…is rising"
What does that mean? What is a "company financing local governments"? Is this public or private sector debt he's talking about here?
"The problem, then, is not that there will be defaults. The problem is that the only alternative to default is to service the debt, and this is what will cause the real damage to the economy."
Why will servicing the debt damage the economy?
If the external environment is tough, the demand impact of a sharp drop in investment cannot be made up for by a surge in the trade surplus – in fact the trade surplus may actually contribute negative demand.
How can a trade surplus contribute negative demand?
Here are some billyblogs:
A good one line summary is: "We cannot assume that the Chinese are as stupid as we are in dealing with economic policy."
from
Myths about China
China is not the problem
China is to blame – freedom and current accounts
Yuan appreciation – just another sideshow
Wray has some stuff here & there, especially on the hidden fiscal spending through the (formally) bad debts of the banking system. Michael Pettis would call all of them "China Bulls".
Some of those Pettis quotes are hard to understand. I think he means companies buying municipal bonds for the first.
Debt service damaging the economy is pretty screwy. Remind me to get a loan from him. To do a favor to him, I won't repay him, to not damage his economy. As he says, probably rightly, that the debts will be good, be serviced by the central government, then to that extent they are just disguised fiscal spending. He makes some hidden full employment assumptions in order to misunderestimate their economic benefit. If this hidden fiscal spending is needed to get to full employment, has a good "multiplier" total benefit to the economy, then it is a free lunch. It probably is. The resource transfer only comes into play if this fiscal spending is inflationary, a word which doesn't appear in this article.
I have no idea what he is saying about trade surpluses contributing negative demand.
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