As we ease on into 2014, one wonders which potential fiscal issue might derail our stuttering economic recovery. Rising rates? Perhaps. How about a bubble in housing? I don’t think so. Debt ceiling in the US? Only if Congress can find a way to become more dysfunctional. That’s like expecting Kim Kardashian to be classier. It just can’t happen. So what might send our economy to the ropes?
Ever so quietly, at least in Western media, China’s economy is dismantling under the burden of bad debt. In a scenario eerily similar to our most recent fiscal crisis, Chinese banks have made loans to anyone with a pulse at the directive of the Communist government. For some weird reason, right when the rest of the global economy was melting, China’s government seemingly looked at that debt-driven implosion and said “Wow, let’s try that here!”
And they did! In 2008, outstanding debt in China was $9 trillion (US$). Today, it stands at nearly triple that amount or $24 trillion! That is $15 trillion lent over five years. That amount equals the entire size of the U.S. commercial banking sector, according to the article above. To which I say “WTF!?”
Was it the 40% reduction in home values? The 45% drop in the stock market? The double digit unemployment? The massive corporate bailouts? Maybe the Chinese government enjoyed the sight of millions of homeowners around the globe losing their homes? Just what was it about our debt-driven debacle that had the Politburo and their Paramount Leader think “Hey, that would be fun with our 2 billion folks, don’t ya think?”
“The implications of this brewing storm are bigger than many global investors realize.” states Mr. Chovanec in his article on Bloomberg. How the Communist government will wriggle out of this mess is hard to see. How it effects the global markets is even murkier. But one thing is certain, China has a problem with their banking system. One thing they have going for them is there isn’t going to be any bickering between political parties to make the crisis worse as we saw in the Western world in 2008. I guess that is one advantage to the Communist world. Whatever the Politburo decides to do will happen without debate between political factions. Let’s just hope what they choose to do works.