'Rich is the Man with No Debts'
Wise as the above Chinese proverb is, it is completely incorrect when applied to current day economics.
Without debt, we would be poor indeed.
That is one of the key premises of our Asian Capital Development (ACD) model. In order to properly understand this concept, we need to focus on debt and credit - subjects that generate quite a lot of confusion.
In the months to come, we're going to break down just how money is created and more importantly, the differences between money and ‘currency’. We'll also examine how debt is used - why it can, at best, propel economies and at worst, destroy them.
The Debt Drug
Potent, like a drug, an influx of credit can have great initial effects on a society, making it high with confidence and taking it to levels of development never before felt.
Yet due to the marginal productivity of debt, every dollar that gets adsorbed ends up losing a bit of value.
The longer a company, industry or government relies on credit, the less useful the spending power of credit becomes.
Every hit of debt lessens the social high.
This is good news for some, as we shall soon see.
Powerful international financial entities are always on the lookout to carve up the big Asian Peking duck, and they do so via long-term pressure on governments and domestic financial institutions, forcing them to liberalize in exchange for credit.
As Asia is a credit-hungry behemoth, when left unchecked, it's debt addiction can lead to historic collapses, such as that which occurred during the Asian Financial Crisis.
Our ACD model also demonstrates how certain companies can be born that are entirely dependent on the state to function. Like a socially inept 39-year-old still living in his parent’s basement – the country suffers from the drag effect these huge state-owned enterprises can have on the economy.
Government subsidies and grant programs only make the situation worse. There is little incentive to be independently profitable if being bound to subsidies and state support ensures an easy, comfortable existence.
However, as is outlined with the ACD model, it can be a force for growth – when channeled into sectors primed and supported for development.
In countries that have followed the ACD model, governments funnel money into companies and sectors of their choosing – hoping that by doing so, the economy will itself receive a boost (with all the possible kickbacks associated with this too, of course).
You can see from the chart below the ballooning balance sheet of the Central Bank of China: a key indicator of the mounting debt burden. Notice how this period also coincides with China's meteoric rise to the number 2 position it holds in the world GDP rankings since 2010?
Essentially what needs to be understood is that without debt, the global economy can't run. Without debt, there is no means to invest in future growth.
Being in personal debt may be tough, but the more you look at Asia, the easier it becomes to understand why debt is so vital to the functioning of economies here. Once the implications and intricacies of this interplay are realized, profits can be made.