The Decoupling of Debt From Productivity (Unproductive Debt and the Impairment of the Real Economy)
John Deutsch International Development Discussion Paper, Queen's University, DDP 2019-10
15 Pages Posted: 19 Dec 2019
Date Written: November 18, 2019
Unproductive debt and a broken banking system are identified as the main reasons why the real economies of developed countries are experiencing financial crises. It highlights concentration of money and power and largely unregulated financial markets as the main drivers impeding the efficient allocation of economic resources into productive uses. The pursuit of return without risk inevitably leads to the transfer of wealth through a failing banking system which collaborates with hedge funds and global wealth management groups who seek low risk and high returns for the benefit of their wealthy clients. It is argued that conditions conducive to economic development hardly exist in highly indebted countries and that wasteful finance inevitably brings about financial crises and recessions. The promise of a return without risk leads financial intermediaries to direct funding towards the capture of existing assets rather than being invested back in the real economy to create new wealth.
Keywords: economic development, repayment capability, project evaluation, corporate lending, credit risk
JEL Classification: D61, G17, G21, G32, G33, H43
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