THIS week began with the release of a staggering number. In January, new debt issued in China rose to just over $500 billion, an all-time high. Not all of the "new" debt was actually new; some represented a move out of foreign-currency loans and into local-currency borrowing (in order to reduce foreign-currency risk). But the flow of red ink is not a mirage. China's government opened the credit taps early in 2016 in order to reduce the odds of a sharp economic slowdown. Private borrowing in China has grown rapidly and steadily since 2008, even as nominal output growth has slowed. As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP. China is rapidly becoming one of the most indebted countries in the world. So what? There is a cottage industry of analysts out there gaming out the ways in which a crisis of some sort might unfold within China. But with debts of this magnitude accumulating, you don't need to posit a looming crisis to draw some reasonably strong, and reasonably gloomy conclusions about the near-term future of the Chinese economy—and the world as a whole.

At some point, Chinese corporates will need to deleverage. It is hard to say precisely when or why, but a deleveraging at some point is inevitable. The result of that deleveraging, when it occurs, will be a big drag on demand growth within China. That, in turn, will translate into much slower GDP growth, unless some other source of demand can be found.

China could try to boost demand by encouraging more spending and investment by non-corporates. This probably wouldn't work especially well, if the history of other economies in such circumstances is any guide. Households have also been adding debt at a good clip. To get them to borrow at an even faster pace, especially at a time when (presumably, given the corporate deleveraging) animal spirits are not at their most spirited, the Chinese government would basically have to force new loans down households' throats. Certainly, we could expect China to hit the zero lower bound on interest rates and to begin QE.

Zero rates and QE would place significant downward pressure on the value of the yuan. That's just as well, since another thing history tells us is that demand-deficient, deleveraging economies depreciate their currencies and rely on exernal demand to support growth.

Of course, most countries in the situation we're imagining here aren't already running big trade surpluses. It is possible, given the importance to China of supply-chain trade, that even a big depreciation wouldn't boost demand in the economy very much, since it would make imported components more expensive even as it made exports cheaper. If those arguments are right, they suggest that a Chinese adjustment would require either a really big depreciation, or would be slower and more painful, or a bit of both.

Conventional wisdom has it, however, that China does not want to depreciate the currency. Depreciation might not boost net exports by much, but it would make dollar-denominated loans more expensive (increasing the pressure on some of those deleveraging corporates), it would squeeze Chinese consumers, and it would represent a big loss of face for the government. If China were to resist depreciation, then the demand shortfall would be much larger, and the pain of the deleveraging process would be greater. What's more, if China did not wish to see its reserves vanish with startling speed, its government would need to re-impose stiff capital controls. Even the stiffest of capital controls might prove too leaky to prevent the drip-drip-dripping away of reserves (and eventual pressure to depreciate) unless the Chinese government simultaneously imposed stiffer controls on both trade and investment. Yet that would not be a good thing for the Chinese economy at all. It therefore stands to reason that while the government might resist depreciation of the currency for a while, it will eventually begin to look the least bad of the available options.

There is a third potential source of demand: government borrowing. While the Chinese economy as a whole has lots of debt, the central government's debt load is relatively modest at between 40% and 50% of GDP. It seems a sure thing that in the event of a sudden deleveraging, China's government would have no qualms about assuming troubled debts, taking over wobbly firms, and borrowing for massive public-investment campaigns. It shouldn't have any trouble financing the debt, either by encouraging the patriotic domestic consumption of government bonds or through QE. But how effective would spending be at boosting demand? It's hard to say. If the government were simultaneously resisting depreciation, China's experience might look an awful lot like Japan's, in which big budget deficits were not enough to spark a robust recovery.

Maybe—maybe—the Chinese government could hit the policy sweet spot. Maybe it could, all in one smooth go, depreciate, let deadbeat firms fail, protect the creditors that need to be protected to prevent a panic, maintain the flow of credit to good borrowers, credibly promise to maintain aggregate demand through monetary easing, and support that promise as necessary through aggressive fiscal stimulus. In practice, governments always get some big things wrong before getting things right. And so what we are left with is either a slumping China which exports some of its demand weakness abroad as it depreciates, or a China that resists depreciation and therefore slumps in much more serious fashion, and which ends up exporting demand weakness anyway. A Chinese slump would send a sharp disinflationary impulse across the rest of the world. If the rest of the world is still stuck with low inflation and low interest rates when this occurs, as seems probable, then this impulse will not easily be offset. And this all assumes that China manages to avoid a major banking crisis.

Who knows what might happen next. Perhaps the euro zone would slip back into recession and then break up. Perhaps everyone would simply grit their teeth through another few years of economic difficulty. But the bigger China's debt pile grows, the bigger a Chinese deleveraging episode looms ahead, somewhere in the not-so-distant future.