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How The Debt Trap Swallowed Asia In Three Charts
When it comes to the topic of the marginal utility of debt, or how much GDP does a dollar of debt buy (an example of which can be seen here), most people are aware that the developed world is facing ruin: with debt across the west already at record, nosebleed levels, and with GDP growth slowing down (due to capital misallocation, thank you Fed, demographic and productivity reasons), it is only a matter of time before it doesn't matter how many trillions in debt a given treasury will issue (and a given central bank will monetize) - the credit impulse will simply not translate into incremental economic growth.
But did those same people also know that Asia is almost as bad if not worse as the west when it comes to the marginal utility of debt, or as the FT calls, it credit intensity.
Here, in three simple charts, is a visual summary of Asia's debt trap:
Asian economies have experienced a surge in credit intensity – a measure of the borrowing required to generate a unit of growth
Rising consumer and corporate debt – some infrastructure and construction-related – has helped growth at a time of weak exports
The low cost of credit has helped growth, delaying structural reforms in countries including China, India and Indonesia
Some further thoughts from the FT:
While much has been written about China’s debt addiction, the experience is far from unique within Asia. Credit levels have risen sharply since 2008 in Hong Kong, Singapore, Thailand and Malaysia, while already high levels of household debt in South Korea and Taiwan have tracked even higher.
During times of accelerating growth, that might not be a cause for concern. But now much of Asia is faltering. Credit intensity – the amount of borrowing needed to generate a unit of output – has surged, while productivity growth has tumbled. The debt train appears to be fast running out of track just as the world prepares for higher interest rates.
“There’s no problem in having the debt to GDP growth go up. It doesn’t have to collapse necessarily as long as you can turn around productivity growth,” says Fred Neumann, Asian economist at HSBC. “The big problem Asia faces is to implement structural reforms that are politically unpalatable before a crisis actually occurs.”
Reforms or not, all of the above is well-known to Zero Hedge readers who first, before anyone else, saw what in our opinion is perhaps the most important, and most underappreciated chart of the New Normal (one which has since been used by everyone from the WSJ to FT to NYT to Fitch): the comparison of bank asset growth in China vs the US.
One doesn't need fancy formulas or long paragraphs to explain that a situation in which $1 trillion in credit creation per month leads to ever smaller GDP growth is absolutely unsustainable, and it won't matter if and when the Politburo decides the time for a hard landing has come, as very soon the decision will be made for it.
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"The big problem Asia faces is to implement structural reforms that are politically unpalatable before a crisis actually occurs.”
Hahahahahaha! That's some funny shit right there!
There's that cleaner shirt thesis...damn it
China has essentially re-built the massive money-bubble that caused the global collapse in 2008. What happens when this Ponzi implodes?
http://www.planbeconomics.com/2014/05/how-china-fooled-world-documentary...
China was not indebted nation when the crisis hit the west so China still could run on that steam (consumer credit) for a while
But now the whole world is in debt
P.S.
the same has happened when eastern europe left USSR and joined EU - bankers saw an opportunity to stimulate growth with consumer credit there where poeple still were not in debt - real estate prices started rising fast but then after debt saturation the bust happened. Now most people are in debt and no reflation of the bubble is possible
Well 6 years after the crisis, a real crisis could develope, not so funny now if you were asleep during the first crisis..
Across the world bankers flog the log at the massive heap of debt they have managed to pile onto their clientele. Chart porn for bankers. Real assets for a song. Real assets for a mother-f*cking song.
Motherfuckin song indeed. But in the end you reap what you sow. Always. Reversion to the mean can be a bitch. Hear those hands shufflin in those empty pockets Mr Yellin? Uhh you got situation on your hands honey.
A rolling loan gathers no loss.
I see a lot of red in these charts
Everything that I ever predicted about a biflationary world economy has come true in living color. Dropping credit intensity is just another facet of the same root issue: overcapacity, falling end demand, market saturation and debt deflation co-existing with inflationary forces of too much easy money, too much capital concentration, too few meaningful investment targets
Yep.
Perrty much.
There was a massive SHORTAGE of dollars in 2008.
That says to me if we get a reprieve here..."Chimerica" flies apart and a trillion dollar trading partner gets wiped off the map.
"So long as Government remains the intermediary there is no reason to extend liquidity." That would be the Bank talking.
If the Government tries to force the bank to extend liquidity ("picking winners") then obviously you put the Bad Bank "solution" on the table.
I think the collapse in the gold price last year is a terrifying event.
So far energy prices have held...but if Russia collapses that will change very quickly.
"Then your last intermediary has been taken out" (energy speculators.)
Should be interesting to see where Elon Musk builds his Gigafactory.
If that thing goes up in Nevada I say "it's lights out for the energy patch."
Nope, it was an intelligence coup that can't be denighned six years later. You do the math and just follow the path.
Papered over debt implosion is all I see. With the truth becoming more evident each day... and the elite becoming more and more desperate.
Real "growth" is over. Leverage gave way to bubbles and bubbles now resulting in sovereign nightmares.
I'm confused. Is it...
1) China is fucked because of so much credit growth
2) The U.S. Is fucked because it sold all its gold to China
Correct answer: We're all fucked
If I were the Chinese, knowing that the eventual dollar collapse will likely drag down most other currencies in the world including theirs, I'd print faster and borrow as much as possible to purchase as much hard assets such as gold before the dollar collapse.
financial warfare. everyone races to the bottom while trying to avoid being first. then you can point fingers.
The Chinese are already trying to push the value of the Yuan down in value compared to the US dollar, much to the US's annoyance, currency wars have been going for some years now and will only increase in intensity going forward.
I think we're witnessing your speculation firsthand in real estate markets around the world. China is grabbing assets everywhere. i wonder if its a yuan denominated bidding up of the s&p happening as well.
The trading volume is way too thin if the Chinese were bidding up the S&P. However, real estates in the enclave of ethnic Chinese neighborhood here in NYC are being bid up and the buyers don't all show up at once from 1530 - 1600 hours every single day.
that last chart is misleading. why not consider total credit creation, not just bank assets? stocks should also be taken into account since they are also paper claims on future wealth
Everything that has a beginning has an end
I see the end coming
I see the darkness spreading
I see death
The Matrix Revolutions
What do they care. They have brandy spanking new cities to move into after the nukes go off.
Its all shaping up to an EPIC worldwide storm about 2016 - 2019
I agreed ugliness lies ahead. I love the way it is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.
For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.
http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html
They don't show Hong Kong and Philippines in the chart, so I looked it up and find they are as bad (PI) or worse (HK) than the rest of the gang.
China has entered a great credit trap and is awash in overcapacity and debt. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.
After several years of growing debt concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. This is not just about writing off a few bad loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html
Don't sweat it. If it gets real even precious metals will matter less than base metals like lead and brass. If lead and brass aren't strong enough there are always heavy metals like uranium and plutonium.
No matter what, metals are the solution.
Can't help but miss Japan, or are they no longer part of Asia? Maybe part of a new region we'll call Oceania?