by Mish Shedlock, Mish Talk:
Shifting debt doesn’t solve problems says Michael Pettis. Someone has to take the loss.
With a major property bust underway, China will not be a global leader in growth.
Bailouts will not help explains Michael Pettis at China Financial Markets.
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Good piece by Houze Song on why the property bailout plans being proposed in Zhengzhou and elsewhere are likely to fail. The authorities are simply shifting debt around rather than resolving it.@hzsong @MacroPoloChina https://t.co/4Xk1GhyelK
— Michael Pettis (@michaelxpettis) August 19, 2022
Shifting Debt Doesn’t Solve Problems
- Good piece by Houze Song on why the property bailout plans being proposed in Zhengzhou and elsewhere are likely to fail. The authorities are simply shifting debt around rather than resolving it.
- I’d add that existence of large amounts of bad debt and overvalued assets means by definition that the recorded collective “wealth” of the system exceeds the real wealth. The gap between the two can be thought of as “bezzle”
- That means that “resolving” a debt problem isn’t a matter of shifting it around or extending liquidity. Ultimately it requires writing down the debt and allocating the associated loss, so that recorded wealth in the overall economy is reduced by the full amount of bezzle.
- In that process and for that reasons someone’s wealth must decline, whether workers, household savers, businesses, local governments, the central government, importers, or anyone else. That is why resolving debt is politically so difficult: someone must take the loss.
- Trying to resolve losses and debt in the property sector by shifting debt around from one entity to another without anyone having to take a loss can never be a solution. All it can do is extend the amount of time during which to resolve the problem.