Parky60 Loc: People's Republic of Illinois

The Way Out for a World Economy Hooked On Debt? Yet More Debt
Enda Curran ~ December 1, 2019
Cheap borrowing costs have sent global debt to another record
Options to revive economic growth require even more borrowing

Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

Much of that legacy stems from policy makers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policy makers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk.

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

Central bankers and policy makers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends.

“Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing,” said Mark Sobel, a former U.S. Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads.”

A constraint for policy makers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa and others have also had scares.

As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So called zombie companies -- firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects -- have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted.

The debt d**g is h*****g over the next generation of workers too. In the U.S., students now owe $1.5 trillion and are struggling to pay it off.

Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming. Instead, policy makers have to navigate balances and trade-offs between austerity, financial repression where savers subsidize borrowers, or default and debt forgiveness.

“The best is to grow out of it gradually and consistently, and it is the solution to many but not all episodes of current indebtedness,” said Mohamed El-Erian, chief economic adviser to Allianz SE.

Gunning for Growth
Policy makers are plowing on in the hope of such an outcome.

To shore up the U.S. recovery, the Federal Reserve lowered interest rates three times this year even as a tax cut funded fiscal stimulus sends the nation’s deficit toward 5% of GDP. Japan is mulling fresh spending while monetary policy remains ultra easy. And in what’s described as Britain’s most consequential e******n in decades, both major parties have promised a return to public spending levels last seen in the 1970s.

China is holding the line for now as it tries to keep a lid on debt, with a drip feed of liquidity injections rather than all out monetary easing. On the fiscal front, it has cut taxes and brought forward bond sale quotas, rather than resort to the spending binges seen in past cycles.

As global investors get accustomed to a world deep in the red, they have repriced risk -- which some argue is only inflating a bubble. Around $12 trillion of bonds have negative yields.

Anne Richards, CEO of Fidelity International, says negative bond yields are now of systemic concern.

“With central bank rates at their lowest levels and U.S. Treasuries at their richest valuations in 100 years, we appear to be close to bubble territory, but we don’t know how or when this bubble will burst.”

The IMF in October said lower yields are spurring investors such as insurance companies and pension funds “to invest in riskier and less liquid securities,” as they seek higher returns.

“Debt is not a problem as long as it is sustainable,“ said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, who previously worked for the European Central Bank and Bank of Spain. “The issue is whether the massive generation of debt since the global financial crisis is going to turn out to be profitable.”

BigMike Loc: yerington nv

We'll be leaving fiat currency behind soon. Trump plans in denutting world central banking. The sooner the better!

RT friend Loc: Kangaroo valley NSW Australia

Probably won't get much of a response on OPP but if you do I'll eat my hat.

What type of hat does an economist wear, a ten gallon or a stovepipe ?, .a ten gallon is for before the bust and a stovepipe is for after the bust.

BigMike Loc: yerington nv

The fiat system can't help but collapse unless we have a major "event". It's designed that way.

Trump is forcing the Fed to not raise interest rates and short-circuiting their war of salvation at the same time. He's plans to make them fail.

RT friend Loc: Kangaroo valley NSW Australia

Thanks for the reply and will consider your original post in depth later today, I think economics on OPP is neglected.

BigMike Loc: yerington nv

Americans seem to be an economically r****ded bunch, no doubt.

Lt. Rob Polans ret.

It sure seems that way very often. Sometimes I think I should homestead with my prepper friends, but they stay off-grid unless it's necessary for them to be on. A Very stupid thing in my estimation is my friend's wife is having a baby in a few months. They have no doctor, no vehicle to get her to a hospital should any problems arise and he won't let me bring my 'contaminated' jeep there. Contaminated with outside living. And he thinks he's on top of the world. You'd think he was a dem.

BigMike Loc: yerington nv

Lots of folks off the grid where I'm at.

I'd certainly think twice about children at this late time, but who knows, Trump may have bought us a little more time with his victory than we think.

Parky60 Loc: People's Republic of Illinois

With the g*******ts OPENLY touting their Agenda 2030 "stuff" such as getting the planet to buy into the c*****e c****e lie and its depopulation plans we may be VERY close.

BigMike Loc: yerington nv

The Bible says 2/3 of mankind will survive the 6th Trumpet war. That's over 4 billion.

I think they'll try but it won't work out.

There aren't 2 billion people in the whole western hemisphere, Europe and the ME.

We'll all be affected, but the devil will take his war to Asia, it looks like.

RT friend Loc: Kangaroo valley NSW Australia

We respond to our conceived vested interests it's a difficult subject I'm going to analyze what Parky60 wrote I read it through this morning and it seemed reasonable.

RT friend Loc: Kangaroo valley NSW Australia

That's true I think what Trumps doing is undermining the USD as the primary Global Reserve Currency so far it hasn't happened.

Post WW2 US represented 50% of world GDP the USD was official Reserve Currency when the $ was backed by gold, after gold it was OPEC only selling oil for $ that sustained the primacy of the USD, now it's the investment community protecting their equity denominated in USD's by the rapid expansion of $ printing backed by US bond issues.

In 2018 the US accounted for 15 % of the Global GDP. Now China is the biggest oil importer and OPEC is not that relevant any more, so the USD doesn't have the leverage it once did.

The investment community are demanding access to lots of cheap liquidity always becoming available, of course as we can imagine this is creating bad investment practices, like you say Trumps short- circuiting the Fed's major "event" salvation war.

Maybe, but there is conflicting economic strategies between Trump the Fed and the NSA.

Trump wants cheaper interest rates the Fed wants to reduce it's balance sheet and the NSA wants easy won salvation wars.

RT friend Loc: Kangaroo valley NSW Australia

Zombie companies in China are spending on concrete and steel and they can't make a profit, there's no money in infrastructure its a long term investment.

Chinese companies don't really have to make a profit although not for the same reason US registered companies don't have to make a profit, Chinese companies can't do stock bye backs as money for the purpose is not available, but US companies can, Chinese companies get money made available for known particular reasons.

It's all a rought Argentina doesn't have to pay back IMF loans taken out by the previous Government because the IMF didn't underwrite the loan with collateral securities rendered legally committed to forfeit by signed contract, that's what I heard the new administration just want to keep their line of credit open.

$ 250 trillion Government debt is factual forcing interest rates to be low or even negative, if capitalists had to pay for the privlige of hoarding money, then why wouldn't that reduce the money in circulation and provide revenue for Governments thereby solving the problem?.

Agreed slow growth is going to be the new normal, along with r**ts, no solutions and the
young people charging the old folks with dissonance because we are laid back while young people got their back up.

Green new deal and MMT are opposed by fiscal hawks who are keepin quite at the moment, that migh change after 2020 but I don't think mercantilism will be revived until resource rich exporting nations find a replacement for the Soviet Union and it's sure not China.

The world is dividing into 2 economic camps if credit becomes tigh in one and not the other all hell will break loose, tourism will stop, and the service sector will slow down, rain forests will be cattle farms and the range will be desert much quicker than it would go that way anyway.

Lt. Rob Polans ret.

I said no about children to my wife when I was in my late 40s, I regret that now. He's only 27, and even if the dems get in around 2024 or later they can't touch him. He'll just move to a different house.