Monday, March 12, 2012

And the new growth and confidence is well founded, right?

The challenge to modern financial stability has been the mountain(s) of growing debt.  And for many the solution is to 'buy their way' to prosperity.  On a much different scale I tried that.  It didn't work.  Not that it couldn't at some other scale and managed by some other people, but I am just remembering my own experience.  It was one that I would rather not have had.

And Michael Pettis (Chinese Financial Markets) pens a piece that says what I believe also to be the more accurate truth about debt, and debt servicing, particularly as it relates to advancing further borrowing and then (mis)reallocating the capital.  The can kicking scenario continues ... for now.

A couple of excerpts from Michaels post below:
" ... the unstable and self-reinforcing relationship between underlying conditions and debt servicing costs."

"Fiscal reform in China can only be successful, in this context, if it eliminates loss-making investment activities, and unfortunately I see it doing nothing of the sort."

"If the problem is that China is keeping growth high only or mainly by borrowing and misallocating the proceeds, then hidden losses are rising and one way or another the bad debt must be resolved."

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