Interesting post, but I am skeptical of the conclusion that that China's "problem" is growing unproductive debt. All modern money is generated as a result of a credit-debit relationship that sums to zero economy-wide when the government is included. If government is considered exognenous, then endogenous credit-debits sum to zero and the government deficit is the nongovernment surplus, i.e., adds to accumulated nongovernment net financial assets in aggregate.
What counts is 1) the flows with respect to social, political and economic outcomes, and 2) the quality of the debt, that is, the amount of risk of non-payment in the system owing to inability to meet debt obligations on time.
The relevant question is then not debt itself, but how finance, including money and banking, relates to the production, distribution and allocation of real resources with respect to the economy and society as a whole.
First, no reasonable person expected China to maintain its blister pace of growth will it was playing catch-up with the developed world.
Secondly, the most recent Chinese policy has been make the transition from an export-led economy to an economy with a more balanced of consumption/investment ratio. Using the 80/20 rule, and ideal situation would be 80/20 and China is still very far from that and further than the developed countries.
It should be clear by now that judging China on the basis of Western criteria is a fool's errand, since China is operating under a different system, with different institutional arrangements and different policy goals.
For example, there is some alarm among Western analysts that Chinese consumers are not saving at the rate they were, sparking erroneous fears that there won't be saving to fund investment. MMT and Post Keynesian economists have show that this is bogus. Causality runs the other way, from investment to saving.
The challenge for China is to moderate investment to slow the blistering pace of growth gradually while also increasing the domestic consumption/saving ratio, that the consumption grows along with moderated investment as China makes the transition from an undeveloped economy to an emerging economy to a developed one.
China is a very large country with over a billion people. Some of the economy is still undeveloped, some emerging and some already developed. President Xi was caught up Mao's cultural revolution and spent nine years in one of the most undeveloped areas of China. He is committed to fixing that.
So this is a delicate balancing act. The Chinese government, which is under the control off the Chinese Communist Party, is banking that a command structure that uses some forces forces (socialism with Chinese characteristics) can outperform a chiefly market-based capitalistic system that assumes the emergence of spontaneous natural order.
This is an experiment and so far it is going quite well for China and most Chinese people. We'll have to see.
China’s Slowdown: More There than Meets the Eye
CFE Guru
All modern money is generated as a result of a credit-debit relationship ... Tom Hickey
ReplyDeleteNot if shares in equity, common stock, is also a money form - which would explain why shares can have value with no dividends.
But why should companies share wealth and power when government privileges for private credit creation allow equity owners to legally steal the purchasing power of their workers and of the general population?
One might think Leftists would be in favor of sharing wealth and power but that's not my experience.
"The relevant question is then not debt itself, but how finance, including money and banking, relates to the production, distribution and allocation of real resources "
ReplyDeleteI.E. investment.
But such relationship depends on wage growth and ability to go in debt more. If purchasing power grows then the relationship will stay healthy.
So, the relevant question is "debt itself". Actually, is it payable?. Will debtors have to default and with it stop buying more by going into more debt.
In aggregate, in order to keep debts payable there is a need to grow more debt that will replace money destroyed by paying off old debts.
There is where the Steve Keens conclusion that only the slowdown in debt is enough to cause a recession.
New money needs to come in in order to replace old money in order to make old debts payable.
To keep more debts comming in, the system needs more people and growing wages.
Basically that would be a wage pushed inflation which is how it is most of the time.
The moderate inflation is a necessity to keep old debts payable and to be able to take more debts on.
So, as long as Chinese do not start fighting inflation they will do good.
Inflation is a necessity for a debt economy and it makes a debt forgivness on a slow but mass scale.
So, the answer is debt itself