IDEAS home Printed from https://ideas.repec.org/p/qed/dpaper/4529.html
   My bibliography  Save this paper

Unproductive Debt and the Impairment of the Real Economy

Author

Listed:
  • Savvakis C. Savvides

    (Visiting Lecturer, John Deutsch International Executive Programs, Queen’s University, Canada)

Abstract

This paper discusses some of the issues and causes of modern-day failing economies. Unproductive debt and the “liberalisation” of financial services are identified to be the main reasons why the real economies of many developed countries are experiencing financial crises and are seriously threatened with recession. It highlights that the main driver that is preventing the efficient allocation of economic resources into productive uses, which enhance economic and social welfare, is the concentration of money and power. In addition, the elusive pursuit of return without risk inevitably leads to the transfer of existing 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. The end result is a gross misallocation of economic resources and lack of funding for new capital investment. Because of wasteful lending, commercial banks find themselves increasingly constrained by a balance sheet fatigue as a direct consequence of the resulting excessive levels of private debt. Hence, they resort to selling their loans to hedge funds and asset management companies. The paper points out that availability of funding does not create wealth unless it is directed towards economically viable projects. Moreover, it is argued that the conditions conducive to economic development hardly exist in highly indebted countries. Conversely, wasteful finance inevitably brings about financial crises and recessions. It is therefore imperative for governments to intervene and take corrective action to reduce debt and to stimulate domestic demand. It is also argued that there is no real return without risk. The promise of a return without risk leads financial intermediaries to direct funding towards the purchase of existing assets rather than being invested back in the real economy.

Suggested Citation

  • Savvakis C. Savvides, 2019. "Unproductive Debt and the Impairment of the Real Economy," Development Discussion Papers 2019-10, JDI Executive Programs.
  • Handle: RePEc:qed:dpaper:4529
    as

    Download full text from publisher

    File URL: http://cri-world.com/publications/qed_dp_4529.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Savvakis C. Savvides, 2016. "Overcoming Private Debt: Unblocking and rebuilding the loan burdened real economy in Cyprus," Development Discussion Papers 2016-08, JDI Executive Programs.
    2. Savvides, Savvakis C., 1994. "Risk Analysis in Investment Appraisal," MPRA Paper 10035, University Library of Munich, Germany, revised 14 Aug 2008.
    3. Michael Hudson, 2012. "The Road to Debt Deflation, Debt Peonage, and Neofeudalism," Economics Working Paper Archive wp_708, Levy Economics Institute.
    4. Smith, Adam, 2008. "An Inquiry into the Nature and Causes of the Wealth of Nations: A Selected Edition," OUP Catalogue, Oxford University Press, number 9780199535927 edited by Sutherland, Kathryn, Decembrie.
    5. Savvakis C. Savvides, 2014. "The Pursuit of Economic Development," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 3(2), pages 1-1.
    6. repec:ucp:bkecon:9780226081946 is not listed on IDEAS
    7. Savvakis C. Savvides, 2012. "Financial Markets, Bloated Governments and the Misallocation of Capital," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 1(2), pages 1-8.
    8. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    9. Leslie G. Manison & Savvakis C. Savvides, 2017. "Neglect Private Debt at the Economy’s Peril?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 18(1), pages 1-17, January.
    10. Savvides, Savvakis C., 2000. "Market Analysis and Competitiveness in Project Appraisal," MPRA Paper 9796, University Library of Munich, Germany.
    11. Helen Kavvadia & Savvakis C. Savvides, 2019. "Funding Economic Development and the Role of National Development Banks-The Case of Cyprus," Development Discussion Papers 2019-09, JDI Executive Programs.
    12. Samba Mbaye & Ms. Marialuz Moreno Badia & Kyungla Chae, 2018. "Global Debt Database: Methodology and Sources," IMF Working Papers 2018/111, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Savvakis C. Savvides, 2019. "Collateral Damage," Development Discussion Papers 2019-13, JDI Executive Programs.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Savvakis C. Savvides, 2023. "Risk Analysis in Project Appraisal: The assessment of risk and return in capital investment decisions," Development Discussion Papers 2023-13, JDI Executive Programs.
    2. Savvakis C. Savvides, 2022. "Risk through the Looking Glass," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 23(4), pages 71-98, October.
    3. Helen Kavvadia & Savvakis C. Savvides, 2019. "Funding Economic Development and the Role of National Development Banks-The Case of Cyprus," Development Discussion Papers 2019-09, JDI Executive Programs.
    4. Savvides, Savvakis C., 2017. "Private Debt is the Problem!," MPRA Paper 80627, University Library of Munich, Germany.
    5. Savvakis C. Savvides, 2018. "Socialising the losses and privatising the gains The case of Cyprus five years after the bail-in of bank deposits," Development Discussion Papers 2018-02, JDI Executive Programs.
    6. Savvakis C. Savvides, 2016. "Overcoming Private Debt: Unblocking and rebuilding the loan burdened real economy in Cyprus," Development Discussion Papers 2016-08, JDI Executive Programs.
    7. Leslie G. Manison & Savvakis C. Savvides, 2016. "Towards Sustainable Growth: Rebuilding the Foundations of the Cyprus Economy," Development Discussion Papers 2016-07, JDI Executive Programs.
    8. Glenn P. Jenkins & Chun-Yan kuo & Arnold C. Harberger, 2020. "Analyse Couts-Avantages Pour Les Decisions D’Investissement Chapitre 6:Faire Face À L'incertitude Et Au Risque Dans L'évaluation Des Investissements," Development Discussion Papers 2020-06, JDI Executive Programs.
    9. Sener Salci, 2017. "An Integrated Appraisal of The Péligre Electricity Transmission Line Rehabilitation Investment," Development Discussion Papers 2017-09, JDI Executive Programs.
    10. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 6 (Dealing With Uncertainty and Risk in Investment Appraisal)," Development Discussion Papers 2011-06, JDI Executive Programs.
    11. Leslie G. Manison & Savvakis C. Savvides, 2017. "Neglect Private Debt at the Economy’s Peril: Applying Balance Sheet Recession Analysis to the Post Bail-in Cyprus Economy," Development Discussion Papers 2017-06, JDI Executive Programs.
    12. Savvakis C. Savvides, 2019. "Collateral Damage," Development Discussion Papers 2019-13, JDI Executive Programs.
    13. Manuel Funke & Moritz Schularick & Christoph Trebesch, 2023. "Populist Leaders and the Economy," American Economic Review, American Economic Association, vol. 113(12), pages 3249-3288, December.
    14. Kooten, G. Cornelis van, 2013. "Modeling Forest Trade in Logs and Lumber: Qualitative and Quantitative Analysis," Working Papers 149182, University of Victoria, Resource Economics and Policy.
    15. Heckman, James, 2001. "Accounting for Heterogeneity, Diversity and General Equilibrium in Evaluating Social Programmes," Economic Journal, Royal Economic Society, vol. 111(475), pages 654-699, November.
    16. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2016. "Precise measurement of macroeconomic variables in time domain using three dimensional wave diagrams," MPRA Paper 69576, University Library of Munich, Germany.
    17. Martin, Will, 2021. "Tools for measuring the full impacts of agricultural interventions," IFPRI-MCC technical papers 2, International Food Policy Research Institute (IFPRI).
    18. Abdou, Dr. Dyaa K., 1982. "Government Distribution and Price Policies for Major Subsidized food Commodities in Egypt: An Overview," Working Papers 232845, University of California, Davis, Agricultural Development Systems: Egypt Project.
    19. Glenn W Harrison & Thomas F Rutherford & David G Tarr, 1997. "Opciones de Política Comercial para Chile: Una Evaluación Cuantitativa," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(102), pages 101-137.
    20. Johann Graf Lambsdorff, 2011. "Economic Approaches to Anticorruption," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(2), pages 25-30, 07.

    More about this item

    Keywords

    Economic development; repayment capability; project evaluation; corporate lending; credit risk.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:dpaper:4529. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Babcock (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.