What Blinds Love


By Monish Chhabra ǀ 23rd October 2015

Little children reach the border of a foreign country, clutched under the arms of their mothers or fathers, look into the eyes of their hosts and see...fear!

These refugees may look afraid but the real fear lies in the minds of those who deny them safety, food and shelter.

This is the fear of not having enough, not believing in the abundance that God has given his man, hence not sharing and not recognizing that to deny that child is to deny one’s soul.

Fear blinds love.

So does greed.

Greed extracts and hoards for self, in increasing pace and quantities. But hoards rot.

An economic picture of greed is the debt piled far in excess of the value it adds (whether to a company’s ROE or a country’s GDP). Precious resources are wasted when ever-rising amounts are borrowed for ever-falling utility.

The following is a graph of debt, GDP and stock market of China. Debt data is for the private sector and stock index is from MSCI. All quantities are on logarithmic scale with equalized starting base.

The period until 2008 saw roughly similar increase in the debt as the growth in GDP. The stock market out-paced them both but then corrected sharply. This is usual economics and usual markets.

What happened after 2008 is the unusual bit. The debt – whether to support the high GDP growth or in the blind hope of that growth – blew the lid off the can. The huge gap between the blue and yellow lines shows the excessive allocation of resources at sub-optimal utility.

This gap has to be narrowed by either the yellow line (GDP) moving up faster or the blue line (debt) moving down. As we know, the GDP growth is decelerating in China. That leaves only one option – deleveraging.

Deleveraging is exactly what the US has done since 2008.

The gap between debt and GDP in the US had widened to a large level by 2008. Since then, that gap has substantially narrowed, through the outright fall in private debt.

Through the 35% nation-wide correction in housing prices, numerous bank failures, shrinking of balance sheets, corporate bankruptcies, restructuring loans, massive credit write-offs and payments – the US private sector has undergone a painful but successful debt reduction.

All the money created by the Fed through QE did not in fact cause any credit binge in the US. The only QE that was really successful in setting off a credit boom was in China.

For the size of debt in China today and the pace at which it grew, there aren’t many precedents; only a few to get an idea of what happens when a large and fast-growing economy slows down and deleverages.

Japan is one such anecdote.

By mid-90s, the level of debt-to-GDP in Japan had grown to similar level as China now. The following graph shows what happened during the 20 years prior to that (1975-95) and the 20 years since then (1995-2015).

During the first of these four decades, debt and GDP grew roughly in line. From the mid-80s, debt really took off disproportionately and created an incredible gap over the GDP by the mid-90s. That point of time in Japan looks similar to China today.

Since 1995, the gap between the blue and orange line has been narrowing and has almost closed now after 20 years.

The large overhang of debt creates a gravitational pull on the stocks and GDP. The faster the hangover clears, the earlier we can get drunk again.

Whether the economy restructures from investment-led to consumer-led, or from manufacturing to services, or from government-driven to market-driven, the new sectors need resources to grow.

But when the garden is so full, the only way to make space for the new seeds is by taking the old weeds out.

The greed that underlies leverage, is a debt on our future. The fear that underlies hostility (towards people in dire need), is a debt on our humanity. We, as a group, bear the liability.

Love doesn’t come to us. Love is what is left in us when fear and greed are gone.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.