patrick.net

If you focus on the US in that chart, you will not see much credit growth at all. I don't know exactly what's going on with private debt in China. On a per capita basis, private debt in China is much much lower than it is in the US. On a per unit GDP basis, China still has much less private debt than the US. So, it's clear that the Chinese private debt expansion cannot continue at that rate, they are not necessarily in a bad place.

YesYNot says

If you focus on the US in that chart, you will not see much credit growth at all.

I guess that is why Krugman complains about austerity even for the US.

YesYNot says

On a per unit GDP basis, China still has much less private debt than the US.

Really?

YesYNot says

So, it's clear that the Chinese private debt expansion cannot continue at that rate, they are not necessarily in a bad place.

Their current GDP growth is based on this debt growing. Once the debt slows, and stops, hell will break lose.

Look, it's like this: some people and countries save a large part of their income. China, the #2 world economy, saves close to 50% at a national level.
In a good economy money must circulate. When money accumulates in one place and is not spent. This not good.

Faced with this situation, should western countries:
1 - go in debt to maintain their life style in spite of making less money, and spend the borrowed money on Chinese goods.
2 - live within their means and suffer from a lower standard of living, but also in the process: force China to spend more and save less. (because if you buy less, then China sells less, and is forced to do something to compensate).

Krugman says go for (1), the easy solution that solves nothing and makes everything worse in the long term.
Europe says (2) is the way to go. And I think they are right. Painful but will pay off in a few years.

Well, the idea is to encourage people to spend when facing a recession or slow economic times, and encourage savings when the economy is good. The latter choice is a harder sell, b/c when times are good all anyone wants to do is party. Bush II was the epitome of this.

YesYNot says

Well, the idea is to encourage people to spend when facing a recession or slow economic times, and encourage savings when the economy is good.

Maybe that was initially the idea but it has turned into a bad joke.
Rates have been lowered in recessions, kept low for long periods, and barely ever raised.
What should be a tool to address cyclical problems has been made into a long term way to mask the collapse in production in advanced economies.
As a predictable result, the world has been buried in debts, and the consequences will be devastating.

And wait, they're not done yet. Now they will try to forbid cash and impose negative yields.
It's flogging a dead horse.
It's so enormously stupid, you can't wrap your mind around it.
But hey.... Some Nobel price will come and rationalize it for you. I guess some people, somewhere, profit from it.

Heraclitusstudent says

Maybe that was initially the idea but it has turned into a bad joke

Mostly because taxes are historically low, and Republicans like it that way. Taxes on the rich are considered class warfare. Wealth is concentrating and the only way to keep the economy moving along is to get the majority (spenders) to borrow. As a percentage of GDP, debts are getting pretty high, but they are not astronomical. If you remember back 15 years they were predicting surpluses coming out of our ears. Hence the bush tax cuts.

Trying to bring back manufacturing would only work if our product design and marketing companies did not have to compete with foreign companies that do outsource production.

YesYNot says

Mostly because taxes are historically low, and Republicans like it that way.

Fiscal deficit is the other side of the same.
What Keynes argued is to run a deficit in bad times and a surplus in good times. As a counterweight to the business cycle.
Now this has turned into a permanent deficit spending to stimulate in economy in good and bad times. Just a bit less in good times.
Not only that, but with the monetary stimulus causing large mal-investments (like housing bubble, over investment in oil, etc...), the government is left to hold the bag for the private sector by bailing-out out banks periodically.
This naturally results in large gov debts in many countries. They are just following their economic philosophy....
But now this is to mask a structural problem that HAS NOTHING TO DO WITH THE BUSINESS CYCLE.

What we have now is not an austerity problem. We do have a large budget deficit.
This is not simply about simple off-shoring, or mfg jobs either. This is about trade with countries that save 50% of their incomes, causing a large demand deficit that authorities are desperate to mask by growing debts.
This is also about inequalities, but I would say these also come from trade: winners take the profits. Losers take the pink slip.
Finally this is also about demographics and distortions from the boomers generation worldwide. (contributing to demand deficit).

YesYNot says

As a percentage of GDP, debts are getting pretty high, but they are not astronomical.

{shrug} I don't believe the existing debts by themselves matter.
What matters is we are trying to replace production by debt as a source of income, and a source of spending.
This is not going to work. And it has already caused substantial disruptions.
But we keep betting more and more heavily on this strategy, which simply and obviously doesn't make sense.