Sun. Jan 26th, 2020

Many beliefs were turned on their heads in the “new normal” economic world

Allegedly, trade wars do not cause lasting harm, declining corporate output, earnings, and investment are no cause for alarm, stock prices may continue to rise regardless, and recording global debt is nothing to lose sleep.

Debt has now hit what the Washington Institute of International Finance (IIF) calls “mind-boggling” proportions, and Unctad, the United Nations body dealing with trade, investment and development issues, warned of a new debt crisis. Nevertheless, unfazed markets remain. It seems, to quote Professor Pangloss in Voltaire’s Candide, “everything is for the best in the best of possible worlds.”

The debt mountain has risen exponentially, not only in Asia, but also in the United States and Europe, and policymakers have become as addicted to lending as the corporate and household industries (especially in China) have.

As Changyong Rhee, director of the Asia and Pacific Department at the IMF in Washington told me, “In developing economies, debt is increasing, but if you look at how well it has grown in advanced economies, it’s also very large.” Global debt has risen by only $7.5 trillion in the first half of this year, reaching a record $251 trillion, according to the IIF. “With no sign of a recession, we expect the global debt load in 2019 to reach[ US]$255 trillion –driven largely by the US and China,” he notes.

Even among some leading economists such as Olivier Blanchard, a former IMF chief economist, and now a senior fellow at Washington’s Peterson Institute for International Economics, debt piling up is gaining intellectual respect.

They argue (according to modern monetary theory) that governments that can issue generally accepted currencies (dollars, euros or yen) should borrow freely to finance fiscal stimulus while interest rates remain low. More and more, the world’s leading central banks are also claiming that monetary policy can not afford to be the only game in town forever and that fiscal policy has to do more to support growth (or stave off recession).

Perhaps. But since policymakers can hardly raise taxes to invest more unless they want to downturn their delicately poised markets, they will need to borrow more, which will increase competition for funds.

This, in turn, means rising money costs because less of it will be printed by central banks. This will surely result in upward pressure on interest rates, not only for governments but also for borrowers in the private sector.

And there it strikes, because in debt, the private sector already shows the public sector how to do it. According to the IIF, by the middle of this year, the global corporate sector (excluding financial institutions) was in debt for a total equivalent to 92% of GDP.

China, which has hit 155% of GDP in the corporate sector, leaves everyone behind except Hong Kong, where the ratio is 224%. It is unclear why the level of Hong Kong is so high, but one expert source suggests that lending to Hong Kong firms may be one way for the Chinese to move money out of China.