...The great Satyajit Das, one of the few macro-economists worth listening to (I am partial to him because he does not feel compelled to window-dress economic arguments in usesless mathematical models that hopelessly conflate variables) lays out the Paper Dragon's problem in a recent Bloomberg interview:
Pressley: Chinese state-controlled banks are meantime on the hook for bad loans to state-owned companies. Is that a Ponzi scheme?
Das: It is. I do a simple piece of mathematics. The Chinese say they’re growing at about 10 percent. But they’re pumping the system full of bank debt equal to 30 percent to 40 percent of gross domestic product. Of that, a third to a quarter isn’t coming back.
If one-third doesn’t come back, they’re losing 10 percent. The state-owned companies’ production shows up as GDP. Are they growing at 10 percent, or do the losses mean they’re growing at zero? Are they converting capital into income? Isn’t that what the U.S. did when it borrowed against home equity to fund growth?