The most famous unconventional economist talks about debt in China and why it’s a problem
Date: January 18, 2016
By: Valentin Schmid
It’s the debt, stupid. This is what professor Steve Keen of London’s Kingston University has been
saying all along: Private debt is responsible for financial crises. He’s also been saying that conventional economists are wrong, and even wrote a book about it: “Debunking Economics.”
Apart from his razor-sharp logic and witty style, Keen was one of the few analysts who predicted the financial crisis in the West in 2008. Now he sees another crisis looming in the East.
The Epoch Times spoke to Steve Keen about why private debt is again responsible for China’s economic problems and why the debt fueling China’s stock market is the most ridiculous thing ever.
A private person can’t direct the central bank to pay that debt.
Epoch Times: How did China avoid the financial crisis of 2008?
Steve Keen: The crisis in 2008 destroyed their export policies. There was a 45 percent fall in Chinese exports in one year.
The response at that time was to dramatically boost private lending, trying to cause a boom domestically, to take the place of exports which they have relied on. So you had an enormous increase in private debt in China.
Epoch Times: Some people say that doesn’t matter because in China the debtors are mostly related to the government.
Mr. Keen: It’s state-owned banks and state-directed banks that lent to private institutions. The liabilities are private. State-owned banks have loaned to private companies. Almost all of the increase in debt is to private organizations, and almost all of that has gone to Chinese property developments.
It’s not like the debt in the West where private banks lend to private organizations. What matters is, who owes the money. It’s still owed by private individuals and companies. If they can’t pay, they are bankrupt and they want to run away and get out of their liabilities. This is going to cause the usual downturn in the economy, even though the debt is owned by state-owned banks.
It comes down to who the liabilities are owed by. If the federal government has a debt, it can direct the central bank to pay that debt. A private person can’t direct the central bank to pay that debt. [FULL STORY]