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The one parent comment here addresses consumer credit/debt in the US. The article is about unsustainable debt building up in emerging markets due to attractive

The one parent comment here addresses consumer credit/debt in the US. The article is about unsustainable debt building up in emerging markets due to attractive interest rates on risky bonds in an environment where safe, conventional returns of 5-9% are extremely hard to come by: A dollar-denominated government bond issued in 2012 by Zambia, a copper-rich country with an average GDP per person of $1,700 a year, offered just 5.4% interest; even so, it was 24 times oversubscribed as rich-world investors clamoured to buy. The following year a state-backed tuna-fishing venture in Mozambique, a country even poorer than Zambia, was able to raise $850m at an interest rate of 8.5%. Now data from the IMF is showing that corporations and governments were probably not investing these loans into profitable activities: Growing debt in emerging markets is not of itself something to worry about. It may be that savings are getting into local capital markets more effectively or that there are more, better investment opportunities. Sadly, those happy possibilities do not seem to account for what is now going on. While corporate leverage in emerging markets has been going up, corporate profitability there has fallen, says the IMF. There is plenty of evidence to suggest that rapid debt build-ups are the hallmarks of periods of indiscriminate lending that eventually end in tears. So this article has little to do with the average American consumer. It's about banks looking for higher rates of returns in riskier markets and doing dumb things with their money. If they have not sufficiently calculated and priced out these risks, which is what happened in 2007 (purposefully), then a lot of this debt might start defaulting, which could lead to another financial contraction as banks find themselves yet again with risky, misvalued assets on their balance sheets, eating up an unsustainable portion of their portfolios and limiting their ability to lend. The difference is that screwing up corporate lending might not be as damaging as fudging consumer lending, such as mispriced and unsecured mortgages. The author draws this conclusion from the findings of one OECD paper, so take that with a grain of salt. Does anyone want to discuss the actual contents of the article, rather than what they think the title implies?

Shivetya 11y ago
I guess the question becomes, should more regulation be put into place to prevent lending to economies at risk or does that become impossible as many of these countries won't take kindly to being locked out of the markets? Who pays when they decide not to? Greece is one helluva mess but without real dollar numbers attached to the various countries in real danger what is our exposure?
fauigerzigerk 11y ago
>The author draws this conclusion from the findings of one OECD paper, so take that with a grain of salt. Actually he cites two papers on that difference, but I wonder whether the outsized weight of China for the global economy and in all these statistics makes any conclusions drawn from past episodes even relevant. Much of the corporate debt in many parts of the world was used for building production capacity meant to supply China. If all of that has to be written down, things could get pretty ugly. I recently read somewhere (I believe on Bloomberg) that 90% of the value of all mergers and acquisitions in the resource sector since 2007 were already written down. That is a terrible testament to management quality in my view.
- gech 11y ago
  Can you expand on this to me a layman? What does it mean, written down? And why does it say whatever it does about management?
  - roymurdock 11y ago
    Let's say I take my entire net worth, $500k in cash, and buy a house straight up for $500k, thinking it will be worth $600k a year from now. If someone were to come along and audit me right now, we would see -$500k in cash, and +500k in assets (my new house). A week after I buy my house, the housing market crashes. Now, the highest anyone is willing to pay for my house is $250k. If an auditor were to come along and examine my personal wealth balance sheet, they would see that I reported assets of $500k a week ago, but that my house is only worth $250k now. Now I have to "write that purchase down" by $250k on my personal balance sheet so that it matches its true value on the market. I lost half my paper net worth in a week due to a poor investment decision. (Individuals are generally not required to do this type of accounting, but public firms are so that investors can make informed decisions about which companies to fund.) If you make risky bets, you're usually going to have to "write down" or "write off" (take a 100% loss) what you were once counting as valuable assets. Some write offs are inevitable, but if you let them get out of hand its definitely a sign of shoddy investing methodology and poor risk management.
chongli 11y ago
It's about banks looking for higher rates of returns in riskier markets and doing dumb things with their money. It's not their money, it's our money. That's what this is all about: moral hazard[0]. [0] https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
SCAQTony 11y ago
I want to discuss the second to last paragraph or what the end game is going to be: Inflation or deflation? Here is the paragraph: "...More quantitative easing in Europe while America tightens monetary policy is a recipe for a stronger dollar. If the greenback rises far enough, that will hurt export earnings in America, which will eventually feed through to weaker investment and softer GDP growth. The Fed may thus find that even a gradual increase in interest rates will have to be cut short. ..." AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED. With that in mind what are the consequences if the FED does one or the other? What is next, asset inflation or asset deflation? Thank you.
- roymurdock 11y ago
  > AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED Fed sets short term interest rates in the entire market (including what the consumer sees) through FFR. That's why everyone is having such a fun time speculating when it will raise the FFR, thereby raising short-term interest rates for the entire economy. In a traditional economic model, raising the short-term interest rate deters spending in the real economy and encourages saving as it allows a return on low-risk activities - savings accounts and bonds. Clearly, having the interest rate at 0% has not spurred spending/consumption as the Fed had hoped post 2007. So they embarked on QE to push money into banks with the hope that these institutional gatekeepers would find good things to do with the trillions of newly minted dollars. Now banks are sitting on lots of money and have inflated the stock market and have most likely made an outsized number of dumb bets in the emerging country debt market, as well as the Chinese real estate market. In my opinion it makes no sense for the Fed to either raise or lower the interest rates. While this would spur the banks into action (lowering would make them take riskier bets, raising would allow them to put more into bonds) it would not fix the underlying deficit of aggregate demand. The Fed keeps pushing on the supply side. We need the government to push tax dollars efficiently into sectors that will spur aggregate demand. R&D, infrastructure, education, and war are all examples of long-term investments that will grow demand over decades rather than a few years before another bubble (as we're finding out now). I doubt we'll see either hyperinflation or hyperdeflation because the supply of money in the real economy is efficiently limited by the banks. Unless the Fed was to conduct a helicopter drop and start a round of QE that fed directly to the consumers, we won't see a meaningful change in the currency in circulation, which is what causes hyperinflation/deflation.
pyre 11y ago
> The difference is that screwing up corporate lending might not be as damaging as fudging consumer lending How? On of the reasons that GM was in trouble (after 2007/2008) was that they couldn't secure enough capital to keep their operations running. How would this not have averse effects on the economy?
hammock 11y ago
Data from the IMF must be taken with a grain of salt given that their agenda is to provide loans with impossible terms and then repossess national resources when a country defaults. "America has put [the debt crisis] behind it" isn't quite true either. A large part of the cash withdrawn from ZIRP and quantitative easing has gone straight into record-setting stock buybacks over the last three years, propping up the market and increasing income inequality without creating any real value or skilled jobs.
- crdoconnor 11y ago
  The IMF's research arm is actually remarkably objective (even left wing sometimes) which is odd given what their bosses get up to. They've pretty consistently released research saying that austerity is a self destructive policy, for instance, much to the chagrin of their bosses.
- roymurdock 11y ago
  The IMF isn't the most effective org, but it's a bit hyperbolic to compare it to a predatory loan shark. Sure, it follows the agenda of the largest contributors (US, Germany, France) but I think it's a bit of a stretch to say that its ultimate goal is to transfer meager resources from Burkina Faso and Yemen to more developed nations. In fact, it's a good thing that they are as strict as they are with loan terms. The IMF's biggest existential threat is to be seen as a weak creditor by setting bad precedents and losing a lot on loans. See the Fed for an example of setting a terrible bailout precedent. I agree that America has not put the debt crisis behind it. QE liquidity continues to prop up the stock and housing markets. Good news is that there won't be a crash because there's enough money out there to justify high paper valuations, and the Fed will provide more if necessary.
- HiLo 11y ago
  Yeah so actually the IMF puts out some great economic research that is pretty highly regarded across the econ community, further, your pet theory for what happened is really only accepted in maybe some media outlets, but not really the academic community. "A large part of the cash withdrawn from Zero Interest Rate Policy"? Like what? That doesn't even make sense. Are you talking about how low interest rates and a dearth of profitable investment projects causes CFO's to see that the best immediate use for their cash is to return money to shareholders and shore up their balance sheets, after this huge balance sheet recession we had? The generally accepted theory is that there has been a worldwide demographic slowdown combined with a large number of countries accumulating huge current account surpluses, leading to "the world being awash in savings." This oversupply of capital causes the natural rate of interest to drop, and that is the rate that the Fed needs to follow (it really doesn't so much decide on a proper rate as much as it estimates it mathematically), as it will cause stagnating growth or deflation if too high compared to the natural rate (!!!!!), but will cause inflation if it's actually "too low." So there's no evidence ZIRP has been "too low," in fact all the evidence points to the fact that interest rates actually haven't been low enough.

Shivetya 11y ago

I guess the question becomes, should more regulation be put into place to prevent lending to economies at risk or does that become impossible as many of these countries won't take kindly to being locked out of the markets? Who pays when they decide not to? Greece is one helluva mess but without real dollar numbers attached to the various countries in real danger what is our exposure?

fauigerzigerk 11y ago

>The author draws this conclusion from the findings of one OECD paper, so take that with a grain of salt. Actually he cites two papers on that difference, but I wonder whether the outsized weight of China for the global economy and in all these statistics makes any conclusions drawn from past episodes even relevant. Much of the corporate debt in many parts of the world was used for building production capacity meant to supply China. If all of that has to be written down, things could get pretty ugly. I recently read somewhere (I believe on Bloomberg) that 90% of the value of all mergers and acquisitions in the resource sector since 2007 were already written down. That is a terrible testament to management quality in my view.

gech 11y ago
Can you expand on this to me a layman? What does it mean, written down? And why does it say whatever it does about management?
- roymurdock 11y ago
  Let's say I take my entire net worth, $500k in cash, and buy a house straight up for $500k, thinking it will be worth $600k a year from now. If someone were to come along and audit me right now, we would see -$500k in cash, and +500k in assets (my new house). A week after I buy my house, the housing market crashes. Now, the highest anyone is willing to pay for my house is $250k. If an auditor were to come along and examine my personal wealth balance sheet, they would see that I reported assets of $500k a week ago, but that my house is only worth $250k now. Now I have to "write that purchase down" by $250k on my personal balance sheet so that it matches its true value on the market. I lost half my paper net worth in a week due to a poor investment decision. (Individuals are generally not required to do this type of accounting, but public firms are so that investors can make informed decisions about which companies to fund.) If you make risky bets, you're usually going to have to "write down" or "write off" (take a 100% loss) what you were once counting as valuable assets. Some write offs are inevitable, but if you let them get out of hand its definitely a sign of shoddy investing methodology and poor risk management.

chongli 11y ago

It's about banks looking for higher rates of returns in riskier markets and doing dumb things with their money. It's not their money, it's our money. That's what this is all about: moral hazard[0]. [0] https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard

SCAQTony 11y ago

I want to discuss the second to last paragraph or what the end game is going to be: Inflation or deflation? Here is the paragraph: "...More quantitative easing in Europe while America tightens monetary policy is a recipe for a stronger dollar. If the greenback rises far enough, that will hurt export earnings in America, which will eventually feed through to weaker investment and softer GDP growth. The Fed may thus find that even a gradual increase in interest rates will have to be cut short. ..." AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED. With that in mind what are the consequences if the FED does one or the other? What is next, asset inflation or asset deflation? Thank you.

roymurdock 11y ago
> AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED Fed sets short term interest rates in the entire market (including what the consumer sees) through FFR. That's why everyone is having such a fun time speculating when it will raise the FFR, thereby raising short-term interest rates for the entire economy. In a traditional economic model, raising the short-term interest rate deters spending in the real economy and encourages saving as it allows a return on low-risk activities - savings accounts and bonds. Clearly, having the interest rate at 0% has not spurred spending/consumption as the Fed had hoped post 2007. So they embarked on QE to push money into banks with the hope that these institutional gatekeepers would find good things to do with the trillions of newly minted dollars. Now banks are sitting on lots of money and have inflated the stock market and have most likely made an outsized number of dumb bets in the emerging country debt market, as well as the Chinese real estate market. In my opinion it makes no sense for the Fed to either raise or lower the interest rates. While this would spur the banks into action (lowering would make them take riskier bets, raising would allow them to put more into bonds) it would not fix the underlying deficit of aggregate demand. The Fed keeps pushing on the supply side. We need the government to push tax dollars efficiently into sectors that will spur aggregate demand. R&D, infrastructure, education, and war are all examples of long-term investments that will grow demand over decades rather than a few years before another bubble (as we're finding out now). I doubt we'll see either hyperinflation or hyperdeflation because the supply of money in the real economy is efficiently limited by the banks. Unless the Fed was to conduct a helicopter drop and start a round of QE that fed directly to the consumers, we won't see a meaningful change in the currency in circulation, which is what causes hyperinflation/deflation.

pyre 11y ago

> The difference is that screwing up corporate lending might not be as damaging as fudging consumer lending How? On of the reasons that GM was in trouble (after 2007/2008) was that they couldn't secure enough capital to keep their operations running. How would this not have averse effects on the economy?

hammock 11y ago

Data from the IMF must be taken with a grain of salt given that their agenda is to provide loans with impossible terms and then repossess national resources when a country defaults. "America has put [the debt crisis] behind it" isn't quite true either. A large part of the cash withdrawn from ZIRP and quantitative easing has gone straight into record-setting stock buybacks over the last three years, propping up the market and increasing income inequality without creating any real value or skilled jobs.

crdoconnor 11y ago
The IMF's research arm is actually remarkably objective (even left wing sometimes) which is odd given what their bosses get up to. They've pretty consistently released research saying that austerity is a self destructive policy, for instance, much to the chagrin of their bosses.
roymurdock 11y ago
The IMF isn't the most effective org, but it's a bit hyperbolic to compare it to a predatory loan shark. Sure, it follows the agenda of the largest contributors (US, Germany, France) but I think it's a bit of a stretch to say that its ultimate goal is to transfer meager resources from Burkina Faso and Yemen to more developed nations. In fact, it's a good thing that they are as strict as they are with loan terms. The IMF's biggest existential threat is to be seen as a weak creditor by setting bad precedents and losing a lot on loans. See the Fed for an example of setting a terrible bailout precedent. I agree that America has not put the debt crisis behind it. QE liquidity continues to prop up the stock and housing markets. Good news is that there won't be a crash because there's enough money out there to justify high paper valuations, and the Fed will provide more if necessary.
HiLo 11y ago
Yeah so actually the IMF puts out some great economic research that is pretty highly regarded across the econ community, further, your pet theory for what happened is really only accepted in maybe some media outlets, but not really the academic community. "A large part of the cash withdrawn from Zero Interest Rate Policy"? Like what? That doesn't even make sense. Are you talking about how low interest rates and a dearth of profitable investment projects causes CFO's to see that the best immediate use for their cash is to return money to shareholders and shore up their balance sheets, after this huge balance sheet recession we had? The generally accepted theory is that there has been a worldwide demographic slowdown combined with a large number of countries accumulating huge current account surpluses, leading to "the world being awash in savings." This oversupply of capital causes the natural rate of interest to drop, and that is the rate that the Fed needs to follow (it really doesn't so much decide on a proper rate as much as it estimates it mathematically), as it will cause stagnating growth or deflation if too high compared to the natural rate (!!!!!), but will cause inflation if it's actually "too low." So there's no evidence ZIRP has been "too low," in fact all the evidence points to the fact that interest rates actually haven't been low enough.