Thread by @michaelxpettis

There is a lot that is very good about this IMF piece on debt, especially its reference to non-linearities in the structure of debt, but it has a serious flaw in that it implicitly assumes (as do nearly all economists, to be fair) that excessively high...
imf.org/en/Publication…

...debt levels are a problem to the extent that they result in debt crises. In fact debt crises are caused not by high debt levels but by seriously mismatched balance sheets, and while high debt levels can certainly lead to balance sheet mismatches, they are not the same thing...

...What is more, to argue that high debt levels are "bad" because they may lead to debt crises is perfectly circular: they wouldn’t if they weren’t already bad. As John Mills argued as far back as 1868, the problem is the extent to which debt is the consequence of bad economic...

...behavior: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”

In fact while excessively high debt may indeed result in the "bad" outcome of a debt crises, it also might...

...might not lead to a debt crises, but most of the evidence – along with logic – suggests that in the long run this is an even worse outcome. As painful as they are, debt crises force a rapid resolution of the processes that led to excessively high debt levels, and without a...

...a crisis, the process tends to go on much longer, hence its higher cost over the long term which typically comes in the form of very low growth once debt levels can no longer rise (e.g. Japan and Italy).

This is an especially relevant issue for China because, as I have...

...long argued, China is still very unlikely to experience a debt crisis, but it has nonetheless what I would consider to be among the worst debt problems in the world.
carnegieendowment.org/chinafinancial…