Yes, 2004 is ancient history, but China had a larger bad loan problem then, in a smaller economy. So what happened?
Briefly, the People’s Bank of China prints money and buys bad loans, or gives money to banks (bail outs). Today, the PBoC has an inflation target of 3% and the nation has a 2.5% inflation rate, and a real growth rate of about 6%. Since 2004, the real GDP of China has more than doubled.
Would such bad loan problems visit the U.S.!
Japan
Japan is another story that defies Western orthodox macroeconomics. The story of woeful, debt-laden Japan has been repeated endlessly, what with its 240% debt to GDP ratio and aging population. Yet by 2020, the outlook is the Bank of Japan will own two-thirds of Japanese national debt, through its ongoing QE program. Japan has near-deflation, btw.
What to label Japan’s macroeconomic policies, other than Escherian?
Conclusion
Western macroeconomists prefer to leave unexplained as taboo or worse the success China and Japan have had in essentially monetizing debt. It is perhaps worth noting that both nations have run large trade surpluses, and do not need “permission” from anybody to pay down internal debts or even external debts through printing money. Poor Greece!
A fundamental issue is raised: For the sake of honoring “moral hazard” totems, should China and Japan let themselves be crushed under debt burdens? Or is monetizing debt a good option in today’s real world?
Hard to argue against monetization. And easy to argue Greece is beyond rescue in present arrangements.
Note: The term “Escherian” refers to the works of Dutch artist M.C. Escher, whose prints and drawings often included impossible objects and paradoxical architectural features such as never-ending stairways (also known as Penrose stairs).
*This article was originally published in NGDPadvisors.
