Toxic Loans Dragging World Economy Down

In keeping with my focus on economics this week, I saw this story from the New York Times highlighting the global risk of easy money, a.k.a. the stimulus policies of central banks like the Federal Reserve.  It seems that the quantitative easing, stimulus packages, and artificially low interest rates encouraged folks like energy companies to borrow a pile of money to get into capital-intensive ventures like shale oil drilling.

Now, thanks to an aggressive move by nations like Saudi Arabia to keep pumping oil despite the low price to glut the market, the shale industry is all but wiped out, and companies are saddled with toxic debt they are struggling to pay.

China loosened its policies as well, and now is reaping a harvest of bad debts that may never be repaid:

In recent years, banks and other financial companies in China issued a tidal wave of new loans and other credit products, many of which will not be paid back in full.

China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.

“The world has never seen credit growth of this magnitude over a such short time,” she said in an email. “We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”In recent years, banks and other financial companies in China issued a tidal wave of new loans and other credit products, many of which will not be paid back in full.

China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.

“The world has never seen credit growth of this magnitude over a such short time,” she said in an email. “We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

China, with its huge manufacturing base that powers companies like Wal-Mart, and a huge population, may cause a debt crisis that will unravel the global trade fabric again.  Instead of promoting stability, the global intertwining of economics and finance may bring the two great recessions in less that 10 years.