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Something else to keep you awake at night

October 6, 2016

From Zerohedge: The IMF Sounds An Alarm As Global Debt Hits A Record $152 Trillion Or 225% Of World GDP. First the quote and then their comment:

When the debt overhang is severe, balance sheets may also need to be cleaned up. Unfortunately, without government intervention, balance sheet repair often proceeds very slowly, because of coordination problems, market failures, and the inability of distressed banks to absorb losses (Laeven and Laryea 2009; Laryea 2010). However, leaving the debt overhang unaddressed can result in lower consumption and underinvestment (Olney 1999; Myers 1977), which, if compounded by banks’ foregoing profitable lending opportunities (Philippon and Schnabl 2013), will weaken the recovery. This is an argument for targeted fiscal intervention to speed up the resolution of the debt overhang problem. These types of interventions are usually geared toward addressing weaknesses in the banking sector and typically include recapitalization, asset purchases, and sometimes guarantees. But they can also include measures to facilitate the repair of households’ and firms’ balance sheets. A government-sponsored debt-restructuring program in the latter case often includes subsidies for creditors for lengthening maturities, guarantees, or both and direct lending to companies that are viable but unable to access financial markets, as well as the creation of asset management companies.

The bolded section is also known as “kicking the bucket” and is precisely what China has been aggressively engaged in recently, following news that a quarter of its companies can not cover the interest expense on their debt. . . .

The mere thought of China, with its 300% debt/GDP, entering a recession is enough to bring nightmares for any policy planner in the world today.

And there is nothing special about China in having misdirected its resource base into non-productive activities. The US is as bad and others must be given the aggregate statistic.

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