Can the Sovereign-Debt Bubble Last Forever? A Focus on China

I await a trigger that will start a great unraveling of the bond market bubble & a (slightly–less) inflated stock market bubble created by “quantitative easing” (QE) that provided liquidity in support of the continuation of excessive borrowing, especially by governments, including China.

China’s debt-led stimulus to offset the global economic crisis contributed to a massive public-sector debt bubble.

According to Liu Yuhui of the Chinese Academy of Social Sciences, heavy borrowing to fuel investment-driven growth caused local government debt to double in just 2 years to about 20 trillion yuan ($3.3 trillion). He also suggests that the amount of government debt at all levels as a percentage of GDP may have risen by about 16 percentage points last year, up from 182% at the end of 2012 & 167% at end of 2011.

But there are also problems with private borrowing. According to Fitch, China’s private-sector debts rose from 129% of the size of the economy in 2008 to 214% at the end of June 2013.

This dependence on borrowings to drive economic growth is unsustainable.

At some moment, this madness must & will stop. Predicting the timing is impossible. It will come as a complete surprise to most when it does. As it is, most people think that central bankers saved the world from an economic & financial meltdown with their meddlesome ways, without questioning the end-game of their ongoing “unconventional” monetary policies.

In actual fact, central bankers have merely set the stage for a worse set of outcomes than if they had let the too-big-to-fail banks go under in 2007-08.

The reason this Ponzi Scheme has been able to survive so long is that almost every country is in on it. In the past, most governments pursued economic and monetary policies based on their own domestic agenda. Internal imbalances (e.g., relatively-high rates of price inflation; balance of trade deficits; etc) would eventually lead to market-driven adjustments (e.g., capital flight; exchange rate revaluations).

Since all countries that matter are doing pretty much the same stupid things, these adjustments have not yet occurred (maybe in India or Indonesia).

There will be a “The-Emperor-Has-No-Clothes” moment when lenders realize that government borrowing cannot go on forever. Greece alone was not the trigger.

But at some point, there will be an interest rate spike in a significantly–large economy that will prompt something like a contagion effect that will affect rates in many others.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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