Credit Exhaustion Is Global

Europe is awash in credit exhaustion, and so is China.

The signs are everywhere: credit exhaustion is global, and that means the global growth story is over: revenues and profits are all sliding as lending dries up and defaults pile up.

What is credit exhaustion? Qualified buyers don't want to borrow more, leaving only the unqualified or speculators seeking to save a marginal bet gone bad with one more loan (which will soon be in default).

Lenders are faced with a lose-lose choice: either stop lending to unqualified borrowers and speculators, and lose the loan-origination fees, or issue the loans and take the immense losses when the punters and gamblers default.

Europe is awash in credit exhaustion, and so is China. China's situation is unique, as credit expansion has been propping up the entire economy, from household wealth to corporate speculation to the export sector.

As this article explains, The China Story That Is Far Bigger Than Apple, China's trade balance--trade surpluses for decades--is close to slipping into trade deficits.

At the same time, China's once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.

Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt, requiring the acquisition of dollars to service the debt.

So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.

What the article misses is the staggering rise in the cost of living in China over the past two decades. Some services are still affordable to the masses--subway fares are extremely cheap--and private healthcare is a mere fraction of healthcare costs in the U.S.

But other costs--housing, food, clothing, etc.--have shot up to the point that our on-the-ground correspondents report that many living expenses aren't much different than in the U.S.

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Disclosures: None.

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