
The world is entering a third stage of a rolling debt crisis - e15ctr0n
http://www.economist.com/news/briefing/21678215-world-entering-third-stage-rolling-debt-crisis-time-centred-emerging
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JonFish85
I've heard it said (and I don't know how true it is) that during the Reagan (I
think) administrations, they "convinced more than half of the people that they
were in the top 50%", meaning that people began to think of themselves as more
well-off than they actually were, and started spending more than saving.

I have no idea if that's accurate, but it's an interesting thought. For the
economy overall, it's probably best if everyone buries themselves as far into
debt as they can, because it increases spending tremendously. Max out credit
cards, buy as much "stuff" as possible (cars, real estate, college degrees,
whatever).

The problem is that when the first real bump in the road comes along, suddenly
most people are leveraged to the hilt and can't absorb the hit. And it feels
like as long as I've been conscious (and maybe longer, who knows), we've been
in this cycle of "easy money, spend spend spend" followed by "crap, bubble".
Sure there's money to be made on the upside, but there's even more to lose on
the way down.

~~~
hvs
If you drink too much at night, you'll get a hangover in the morning. The same
is true of spending and debt.

~~~
pdkl95
That's _usually_ true for personal debut. For governments, it's a dangerous
misconception.

The only problem with personal debt is when it becomes systemic. The fallacy
of composition is that what's good for individual is not necessarily good if
we all do it at the same time. Normally lowing your price to be more
competitive is a useful strategy, but not when it becomes a race to 0. We saw
this in the great depression with farmers publicly throwing out their product.

As for governments, the austerity meme is class politics in disguise, and
tends to lead to nasty social blowback. Governments can change monetary policy
and other law, giving them a lot more options.

~~~
marcosdumay
You know, government debit can grow until it's not sustainable anymore. And
seems to be doing exactly that world around for the last couple of decades.

I know this disagree with mainstream economics, and almost all niche economics
theories. But it's happening again and again, so fuck the theories.

~~~
vkou
Which of these debt peaks was unsustainable, and why?

[http://www.mybudget360.com/wp-content/uploads/2010/12/us-
pub...](http://www.mybudget360.com/wp-content/uploads/2010/12/us-public-debt-
vs-gdp.png)

~~~
pdkl95
[https://en.wikipedia.org/wiki/Sh%C5%8Dwa_financial_crisis](https://en.wikipedia.org/wiki/Sh%C5%8Dwa_financial_crisis)

Japan (at the time, primarily a few zaibatsu) had serious financial problems
when their export bubble popped in the 1920s. Unfortunately, they bought into
myth that austerity lowers debts _really badly_ , and decided it was a good
idea to cut out 30% (!) of their GDP in two years. When that only made the
situation worse, they doubled down and tried to cut another ~10%.

The zaibatsu and 37 banks went under in the inevitable bank-run, and quite a
few financial leaders were assassinated when the military realized their
budget was about the only thing left that could be cut.

Compared to that mess, the US has done a relatively good job of inflating away
it's debts. Our gridlock blocked most of the austerity "fixes", so while we
still have a mess of an economy, at least it isn't slashing a third of our
GDP.

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roymurdock
The one parent comment here addresses consumer credit/debt in the US.

The article is about unsustainable debt building up in emerging markets due to
attractive interest rates on risky bonds in an environment where safe,
conventional returns of 5-9% are extremely hard to come by:

 _A dollar-denominated government bond issued in 2012 by Zambia, a copper-rich
country with an average GDP per person of $1,700 a year, offered just 5.4%
interest; even so, it was 24 times oversubscribed as rich-world investors
clamoured to buy. The following year a state-backed tuna-fishing venture in
Mozambique, a country even poorer than Zambia, was able to raise $850m at an
interest rate of 8.5%._

Now data from the IMF is showing that corporations and governments were
probably not investing these loans into profitable activities:

 _Growing debt in emerging markets is not of itself something to worry about.
It may be that savings are getting into local capital markets more effectively
or that there are more, better investment opportunities. Sadly, those happy
possibilities do not seem to account for what is now going on. While corporate
leverage in emerging markets has been going up, corporate profitability there
has fallen, says the IMF. There is plenty of evidence to suggest that rapid
debt build-ups are the hallmarks of periods of indiscriminate lending that
eventually end in tears._

So this article has little to do with the average American consumer. It's
about banks looking for higher rates of returns in riskier markets and doing
dumb things with their money. If they have not sufficiently calculated and
priced out these risks, which is what happened in 2007 (purposefully), then a
lot of this debt might start defaulting, which could lead to another financial
contraction as banks find themselves yet again with risky, misvalued assets on
their balance sheets, eating up an unsustainable portion of their portfolios
and limiting their ability to lend.

The difference is that screwing up corporate lending might not be as damaging
as fudging consumer lending, such as mispriced and unsecured mortgages. The
author draws this conclusion from the findings of one OECD paper, so take that
with a grain of salt.

Does anyone want to discuss the actual contents of the article, rather than
what they think the title implies?

~~~
hammock
Data from the IMF must be taken with a grain of salt given that their agenda
is to provide loans with impossible terms and then repossess national
resources when a country defaults.

"America has put [the debt crisis] behind it" isn't quite true either. A large
part of the cash withdrawn from ZIRP and quantitative easing has gone straight
into record-setting stock buybacks over the last three years, propping up the
market and increasing income inequality without creating any real value or
skilled jobs.

~~~
HiLo
Yeah so actually the IMF puts out some great economic research that is pretty
highly regarded across the econ community, further, your pet theory for what
happened is really only accepted in maybe some media outlets, but not really
the academic community. "A large part of the cash withdrawn from Zero Interest
Rate Policy"? Like what? That doesn't even make sense. Are you talking about
how low interest rates and a dearth of profitable investment projects causes
CFO's to see that the best immediate use for their cash is to return money to
shareholders and shore up their balance sheets, after this huge balance sheet
recession we had?

The generally accepted theory is that there has been a worldwide demographic
slowdown combined with a large number of countries accumulating huge current
account surpluses, leading to "the world being awash in savings." This
oversupply of capital causes the natural rate of interest to drop, and that is
the rate that the Fed needs to follow (it really doesn't so much decide on a
proper rate as much as it estimates it mathematically), as it will cause
stagnating growth or deflation if too high compared to the natural rate
(!!!!!), but will cause inflation if it's actually "too low." So there's no
evidence ZIRP has been "too low," in fact all the evidence points to the fact
that interest rates actually haven't been low enough.

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marcusgarvey
I wish that articles like this were not confined to the international finance
ghettos of The Economist and The Financial Times, but that were also
discoverable in local daily American and European newspapers. Because when we
talk about the professional investors chasing yield and ending up with bad
outcomes, we are also talking about the pension funds and American school
teachers, bus drivers, municipal workers, etc.

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Kluny
Why aren't first world governments issuing bonds with good interest rates
anymore?

~~~
roymurdock
Federal Reserve sets short term interest rates throughout most of the market
through the Federal Funds Rate (FFR). It dropped the FFR to ~0% after the
financial crisis, but instituted a brand new policy: 0.25% interest on
reserves held at the bank in order to get banks to be less risky and loan
against more safe assets that they keep with the treasury.

Conventional economic thinking is that low interest rates spur economic
activity, as individuals and institutions that would have once parked the
money in safe government bonds and earned a return on the interest would
instead be forced to lend out into the real economy to find a decent rate of
return.

The problem is that the money supply is too large due to QE and there is not
enough demand for viable, long-term projects such as infrastructure, R&D,
education.

Plus the government continues to run into the debt ceiling. If it were to
raise interest rates on its bonds, it would be paying out more on its already
enormous debt.

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shostack
Taking this to a much smaller scale...does anyone have any predictions for how
ripples from this will impact the housing markets (particularly in the Bay
Area that has lots of money from China pouring in still)?

~~~
astrange
Is it actually possible to easily invest in housing markets? I looked at some
local REITs but none of their stock prices/returns reflect rent increases at
all, and their share prices have just been down lately.

Actually buying land is still fairly hard to get into!

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HiLo
Wow, nobody mentioned the natural rate of interest yet?

