That means that China can invest in infrastructure (roads, trains, airports, education) which have high real return making the increase in debt much less of a problem. This is also the reason why China has grown persistently 7-10% over the past two decades compared to USA which have grown 2-3% in the same period.
Per person China's GDP is less than a fifth of the US hinting that this still has some way to go.
This is skirting around the edge of an important point: increase in absolute debt level is fine in any economy, what's potential trouble is changes in the rate of debt increase - specifically vs GDP growth - because it affects the total disposable income you have to service it.
Where China has a risk is if they can't transition to a developed country's style of debt spending where GDP growth is much lower. It's also where endemic corruption becomes a big problem.
Not really. Alaska is damn expensive if you are used to lower 48 prices.
That sky scraper in question was built for a small seaside village limited by land because they were stuck between a mountain and water. It was really a one off and I don’t think it contributed much to USA debt.
>Ordos: The biggest ghost town in China (bbc 2012)
> In Inner Mongolia a new city stands largely empty. This city, Ordos, suggests that the great Chinese building boom, which did so much to fuel the country's astonishing economic growth, is over. Is a bubble about to burst?
While now:
>However, in 2017, the ghost city label is getting more than a little difficult to hang on Ordos Kangbashi. According to a recent report, there are now 153,000 people living there, 4,750 businesses are now in operation, and housing prices have risen roughly 50% on average from the end of 2015, when the local real estate market bottomed out. Of the 40,000 apartments that had been built in the new district since 2004, only 500 are still on the market.
In the US, everyone associated with the investment would have lost their shirts years ago. In Communist China, debt pays you!
The really interesting thing is that the units are mostly owned. Why? Because you can't move very much money out of China due to the capital controls, tremendous flows of money go into property -- lots of people buy real estate never intending to live in it, or sometimes even to rent it... there are actually property sales ads that suggest no one should live there as the property is not designed for human habitation. :)
China spend money on infrastructure, meanwhile in the West there is 'Quantitative Easing' with money going straight to the banks.
As you state there is real return in infrastructure expenditure - roads, trains, airports, education is genuine investment. A business case can be made for putting in a new 300kmh train set that spans the country. Over in the West we don't get that, instead we have to pay untold billions to the banks because if we don't then the sky will allegedly fall in so we have to kick the can down the road.
GDP is also a useless figure. If we all decide to decide that our houses are worth double what they were worth five years ago and go about buying and selling these crumbling piles of bricks then have we really increased GDP? If, on the basis of these increasing property values everyone remortgages and buys fancy German sportscars and monster SUVs then have we really increased GDP?
I am sure there is plenty of hubris going on in the Chinese economy and that status anxiety drives people to buy pointless luxury goods as per what happens in America, however, GDP is not all it is cracked up to be and there is a big difference in debt used to build an economy compared to debt used to prop up the rent-seeking classes.
Unfortunately in the US, like you said, it seems like a lot of the capital has gone into west coast real estate and the stock market. Why wouldn't it? It's a lot easier to make money from rents than to actually build things.
I'm always awed by how much indirect ROI you can get from infrastructure, and I'm always disappointed in how bad the US is at it these days. I like to cite the hoover dam as a wildly successful infrastructure project - I visited it for the first time recently and learned that it was built for ~49M USD (639M USD in today's dollars). The indirect ROI on it is epic. It spawned Las Vegas and allowed other west coast cities to grow all along the southwest, not to mention the money it's made back in hydroelectric power and tourism. It did take a crisis (the great depression) to build it for so cheap though... The recession probably would have been a good time to do this stuff. Unfortunately, we got higher asset prices instead.
As for the GDP, yeah, it's a poor measure of growth. Yay, homes are now twice as expensive and people are relatively poorer, but we've succeeded in meeting our growth target!
As with most projects from that era, the environmental impact study/mitigation for such an effort today would probably cost more than the entire original project, even in real dollars, even assuming you would be allowed to build it (you probably wouldn't).
Yeah. The Hoover dam would never happen nowadays, and it has undoubtedly had some environmental effects.
Here is a fun example of how expensive infrastructure is here now:
Irvine to Corona tunnel (11.5 mile tunnel under mountains) which would connect Orange County to Riverside County: estimated 28.3 billion [1]. Both are large population centers with large economies, separated by a small-ish mountain range. They spent almost 30 million on environmental studies.
Norway made a 15 mile tunnel through the mountains for 113 million, or 0.4% of the cost. [2]
Great example... there was also an effort to expand the Tappan Zee bridge from the 1950s, adding a couple lanes was going to cost 5-10x the original iirc.
On the plus side, we have some of the cleanest air and water any civilization has ever enjoyed, so regulation isn't all bad. Maybe the Boring Company can tunnel that out for a mere $250M.
Unfortunately a lot of times those "investments" probably actually provide less value than they cost to maintain, let alone to build and maintain, particularly HSR which is generally only high ROI in a few small, rich countries with large point-to-point traffic over distances short enough that air doesn't make more sense (e.g. Japan). It's very easy to destroy value in building something.
China has a huge population so Per person China's GDP is much lower even including PPP.
Per capita GDP depends on things like natural resources and corruption levels. So China is likely to lag behind on that measure long term, still they plenty of room for improvement.
> That means that China can invest in infrastructure (roads, trains, airports, education) which have high real return making the increase in debt much less of a problem.
What does that have to do with being a developing nation? The US could do the same.
Adding infrastructure has a higher rate of return when there is less infrastructure to begin with. Adding one interstate highway system greatly increased US economic mobility. Adding a second would not have such benefit.
So China, not having the infrastructure the US does, likely gets a benefit on doing projects that would be a loss in the US.
This might be an overgeneralization in this case...
While generally true for developing be developed countries, are you actually familiar with China's infrastructure development practices? If one thing is for sure, it's that there isn't a shortage of bridges, trains, airplanes, and roads... The Chinese government uses infrastructure-building programs to ensure it meets its centrally-planned GDP targets and to make sure everyone has jobs. Economists are actually concerned that the infrastructure is so overbuilt that the costs of future maintenance may make the return on many new infrastructure projects negative.
Meanwhile the US is notorious for crumbling infrastructure...
>are you actually familiar with China's infrastructure development practices?
Yes, somewhat. They've poured lots of money into it over decades to catch up to the developed world. They're not likely there yet.
A simple example: they're close to the same area as the US, around 4 times the population, yet they have around 2/3 as much road miles. They make less electricity per capita than the US. They have less than half as many miles of train infrastructure than the US. If you look at all sorts of metrics for how much per capita that they have compared to the US (or any first world county), they still lag.
So if they want to get to first world levels in many of these areas, they still need to create more infrastructure.
As such, they might still get more benefit for certain infrastructure projects than the US.
>Meanwhile the US is notorious for crumbling infrastructure...
... among people in the US that complain without understanding how the rest of the world fares. In world rankings the US does very well on quality of infrastructure [1,2].
> So, the reason because the US doesn't invest in infrastructure is because the ROI is not high enough?
The reason the US doesn't invest in infrastructure is because the benefits go to everyone instead of a specific party interested enough to lobby for it.
The ROI is the much the same in the US as it is elsewhere, provided the investment is made where it's needed rather than on pork barrel projects. For example, the value of building a bridge is X, but that's also the value of maintaining/replacing it because if it collapses or has to be closed for safety reasons then you no longer have a bridge. Moreover, you can productively build things like new subway lines in cities that are growing because that's where the demand exists to justify the cost.
The lobbying problem is where we've started to see this "public private partnership" scam show up. Then you have a specific party interested enough to lobby for it, but it's because they intend to rent seek on public infrastructure by taking the public's money and then putting up a gate and charging them a second time for admission. Because $100 is a lot, but if you pay $75 in taxes and $75 in tolls then it's less, right? And if that discourages productive use of sunk cost infrastructure and is a regressive tax on the poor, let's try not think too much about that.
What about the things that China has that we don't? Like high speed rail networks? Or things we both don't have, like university that doesn't cost an arm and a leg to attend?
Using per person GDP when discussing China is a cruel joke. Like most usages of per person GDP in any country, it glosses over regional disparities and (more importantly) economic equality measures like Gini coefficient.
Taking Gini coefficient into consideration, China still has a long way to go.
==Taking Gini coefficient into consideration, China still has a long way to go.==
So does the US [1]:
The top 1 percent of earners in America now take home about 20 percent of the country’s pretax national income, compared with less than 12 percent in 1978, according to the research the economists published at the National Bureau of Economic Research. Over the same time in China, the top 1 percent doubled their share of income, rising from about 6 percent to 12 percent.
Gini implicitly assumes a flat distribution is desirable. Ask North Korea and Cuba how that works out.
PPP GDP per capita is okay, but the PPP portion is rife with assumptions, some untenable. For instance, you really really don't want to live in a heavy industrial area in China, the air is like soup -- sometimes it pegs the AQI needle at 999. US hasn't ever had air that bad, even before the Clean Air Act.
But the scale of China population is so that if they double their GDP per capita, they will have an upper and middle class population bigger than most if not all individual countries in the world (EDIT: except India).
At least China's Gini coefficient is going in the correct direction. The US's Gini has been getting worse all while we still have third-world conditions festering for far too long.
China’s official GINI coefficient doesn’t include grey income (e.g. that official making 10k RMB/month yet driving a black Audi A9). Well, they stopped reporting it in the early part of this decade when it started getting really bad.
There are always reporting problems, especially tracking the wealth of the extreme rich. Estimates of hidden income and wealth are in the trillions. Gini in both China and the US are likely worse in actuality. But when you're in the middle of the process of converting your economy from rural to modern then it's much easier to swing the Gini change in the more equal direction.
But because it's a different situation and harder to change in the US, doesn't mean we shouldn't be strongly aware of the implications of its worsening in the US.
They stopped reporting their gini coefficient number altogether. There are no numbers after 2012.
I lived in a Chinese first tier city for 10 years. Income inequality was much more obvious there than I ever saw in the states (even in the boonies of Mississippi). A lot of that was related to china’s caste/hukou system that basically denies social services to migrant workers.
Yes, the USA has first world income inequality problems. But China has third world ones.
The joke goes: the USA has so many homeless people, they are just everywhere! China has no homeless people, because the police beat them pretty harshly so they are either dead or really good at hiding.
The USA could be a developing nation too. We should be building our first settlements on the Moon and Mars right now, eliminating biological limitations like aging and various sources of heritable inequality, sending our first probes to nearby stars with a high probability of hosting living biospheres in habitable zones, wiring every address in the nation with low latency gigabit+ broadband, and upgrading our infrastructure to be fully renewable and post-carbon. That's a very incomplete list of actual first world problems.
A "developed nation" should be called a "day two nation." See Jeff Bezos' excellent shareholder letters. A developed nation has a "day two mentality." No nation is developed but some are stuck.
Part of the problem is that we compare ourselves to other nations and think "wow, we're awesome." We should ignore all other nations and think "what can we do now?"
Unfortunately I'm not optimistic. The last election was a contest between a narcissistic reality TV star and a dull apparatchik with no vision. Our selection of such inferior representatives reflects our collective expectations about our future, or lack thereof.
People need to stop assuming all governments work identically and that numbers are comparable in any way. In China local governments COLLECTS NO TAXES, thus they fund all their expenditures by debt. In 2 years there's going to be widespread tax reform and all this debt will be wiped away.
Good point. Government debt can be understood as delayed taxation. If private sector has higher productivity, delaying taxation may be the best option for overall growth when debt to GDP is acceptable.
Other thing that totally changes the discussion is if the debt in local currency or in foreign currency.
This, but also for central government debt, the government is the issuer of its own currency. As long as the debt is denominated in the same currency, the government can never become insolvent on its debt. The real constraints are always real resources and real economic activity, the lack of which would cause inflationary pressures.
My understanding is this is partly because they had a hard time collecting taxes in the past due to having weak institutions, so local governments raised money from external sources in return for giving those who gave them money a cut of the profit. As China develops it starts replacing these ad-hoc arrangements with more formal ones like you see elsewhere.
They make money by selling land, and they also get a smallish cut of the VAT (replacing business taxes they used to get). They also outsource their debt spending to locally controlled SOEs who theoretically should be able to make money by being an state-owned enterprise.
Also, they make the state-owned banks lend to them regardless, at a low interest rate since there is an implicit garauntee they won’t default.
It isn’t really sustainable. It is only a matter of time before China introduces a property tax to fund local governments.
Clearly you’re not an investor because what brings confidence to investors is commercial defensibility. IP is one of those moats that encourage investment.
> I can pretty much confirm that I have never had real Parmesan Cheese, and neither have you.
That is a bizarre claim. If you’ve only ever bought pre-grated Kraft “Parmesan”, that might be true. But it’s not difficult to buy Parmigiano-Reggiano in nicer grocery stores.
Also the EU has hundreds of special designations. It’s not surprising that the US would decline to give a blanket deference to EU law in this area.
It’s not correct. We have international agreements with China and others nations broadly covering patents and copyrights. We have no such agreements covering regional appellates.
If you don’t see the difference between using a name of appellation and hacking into a computer and downloading research that cost billions of dollars then I’m afraid we can’t have a discussion about this.
The thing is, they don't show the hardware which would go with the spend. The construction equipment used to occupy the Spratleys has to then be followed by new ships, new airplanes, new heavy armor.
Domestically, the provinces are very powerful. the PLA is not out in force in complex, expensive hardware, its paramilitary presence which is not a huge increasing cost given mandatory post-university universal conscription.
Missiles and Nuke are a fixed cost.
TL;DR absent a plan for war (which they don't have, and show no signs of wanting) there is no visible basis to assume a huge hidden military budget.
Cheaply btw. Pumping sand is not hard. And, they're doing it on existing reef structures. The sand only lasts because there is an anchor there.
This is not primarily military budget, any more than the US army corps of construction is military budget when it builds dams and Levees in the USA mainland (which btw, it does, a lot)
Military budget is materiel. Sand, even runways, is not Materiel.
The purpose is to solidify the claim of territory, the enforcement will be military because China won't back down on this, and the law court path has been rejected. Open seas is the current active, western fleet response. If the Chinese miltary get the upper hand in the political conversation they WILL use this to argue for budget, to get more aircraft carriers, and more sea-active weapons. But that is future spend and is not on the current budget horizon is it?
So yes, there is a war war not jaw jaw aspect to building the islands, but the budgetary impact? low. Until they fund bulding the aircraft carriers, and stealth UAVs.
But without those investments those islands are hardly definsible, too far from hainan to be easily resupplied during hostilities and no intrinsic production capabilities in their own. Even with further military try investments, they are still probably strategically useless.
At least it used to be said by China experts that the army was built to suppress internal dissent and not to repel foreign invaders, and certainly not for foreign wars. Since then China has invested heavily in rebuilding its military but I don't know how that mission of the army has changed.
China's geography, size, and population makes a foreign land invasion very unlikely, beyond some strips of land disputed with Russia and India or a tide of refugees from North Korea. Think of how expensive and difficult Iraq and Afghanistan are for the U.S.; China would be orders of magnitude beyond that.
This used to be true, it was definitely true 10 years ago. I doubt that is still true today, though. China doesn’t make these numbers public anyways so we can only guess.
Do you mean 10% higher? Surely you don't think China's GDP is one tenth of it's reported figure. This would have it sitting between Spain and Mexico [1].
China’s GDP is probably inflated, but not by that much. However, considering that any rise in real estate prices is considered GDP growth, a lot of the current GDP can be attributed to the current property bubble.
The comment you are replying to is suggesting that the actual figures are inflated, not the ones they report, meaning actual GDP is higher than reported GDP.
Because the statistics are produced by local apparatchiks, and the local apparatchiks all want their jurisdiction to look like it's breaking records so they can get promoted and become something bigger than a local apparatchik. And the central government wants to look successful too, so nobody there has any interest in pushing back. High numbers mean everybody in the system wins, while low numbers profit nobody, so the numbers come out high.
Chinese GDP is suspiciously stable at exactly the same value for long periods of time, and doesn't seem to correlate with other statistics that usually do correlate, like electricity usage.
IIRC it's not even a secret that China's GDP stats are useless. It's a problem the government has officially admitted to. As a sibling comment notes, the issue is that they aggregate stats from regional governors who are incentivised to tell the party what it wants to hear.
It absolutely isn't. The funny part is, for the past 12+ years voices predicting an economic collapse of China have gotten stronger and stronger, but it just doesn't happen. Every time they passed some magic number in some statistic it was all "zomg collapse is imminent!"
I guess with a government like they have you have greater possibilities to cover up and postpone the effects, but who knows how this will manifest. I'm hesitant to believe any current scenarios painted by western "experts" because they have basically been wrong for the past decade, but every time they're like "but this time it's for real!"
Eh it's absolutely sustainable. China is a monetary sovereign. All of this debt is issued in a currency that they can literally create out of thin air. There is zero possiblity that China will default on this debt. And China has been very careful to avoid externally denominated debt.
The only real risk here currency revulsion. At some point there is a risk that nobody will want the currency. But the risk of internal revulsion is low. Chinese citizens have to pay taxes and many other kinds of fees and fines in the currency. They have no choice. External revulsion is a threat but here again the Chinese have opted to buy out their external dependencies. This is why China wants to own all that farmland in Brazil. It never wants to find itself in a situation where it must buy dollars in order to buy soybeans and other critical food stuffs.
People will go on and on about China's sovereign debt. They just don't get it. This is basic MMT (modern monetary theory). The bigger risk for China is that they grow too slowly not that they grow too fast.
That's now how any of this works. That's certainly not how inflation works.
At some point, particularly given the last 40 years of evidence to the contrary, people need to simply accept that monetary expansion does not "cause" inflation [1]. Inflation is not a monetary phenomenon at all. Inflation is a price level [2] phenomenon largely driven by trade imbalances. Inflation is about market power, or what some call pricing power. The common case here, btw, is when your external partners from whom you need to import critical goods get even a little bit pricing power then you will get inflation. China is seeking to own all its externals and deliberately suppress any such pricing power not driven by its own banks.
If there's more money, and the more money circulates, and the velocity doesn't change, and the real economy doesn't grow (that is, more stuff is not being produced), then what possibility is left but inflation? Or, in your theory, which of the "outs" that I stated is the one that you think is operating in the real world?
From where I sit, the past 40 year have shown that, if you grow the money supply only a little bit faster than the real economy grows, then you only get a little bit of inflation.
Nobody with any credibility has predicted collapse. Recession or crash, yes, but not collapse. China is subject to economic cycles just like every other country is.
The “they keep predicting economic collapse” is a huge red herring used by pro Chinese media to discredit western media who never made such claims out of a few fringe elements like Gordon Chang.
Broadly, constant borrowing is sustainable, just look at any European economy. As long as your tax base grows faster than your interest payments there’s no unavoidable problem.
This? It’s not sustainable. Sooner or later this will result in a correction. This could range from aggressive budgetary measures, an internal crisis all the way to China monetising its overseas investments (which are extremely extensive).
European economies are hardly poster children for constant borrowing. Most of them have been in enforced austerity for years, and have only managed to avoid much tighter spending cuts because the ECB is funding governments through vast amounts of money printing (which boils down to confiscation of savings). Result: huge government spending overruns, ever-falling savings rates.
Erm... Spain and Greece has been in enforced austerity, no other countries I can think of. And neither have had typical, responsible borrowing patterns. (Nor does Italy, but it’s dodged that bullet.)
(Ireland had some problems just after the crunch but a) entirely because they took on a bank they could have let fail and b) they’ve paid that off now.)
Portugal, the UK, Italy to some extent (though nowhere near the level they need). Europe is basically a continent of governments trying to cut their spending levels, some with more success than others.
The UK isn't in enforced austerity. Austerity is a political choice here (driven by a desire to eliminate the deficit), and a pretty bad one (the IMF said we should be spending more, also it looks like we will be irrespective of what the public wants soon because of Brexit). Basically, whilst the UK's economic woes are self-inflicted, over-borrowing isn't the cause of them. Italy definitely has over-borrowed, but its problems go way deeper than that and I wouldn't describe its spending right now as "austerity". Portugal, like Ireland, has already dug itself out of the hole.
Going back to my original point: if increasing your revenue faster than increasing your interest payments, you can do this forever. Sure, the credit crunch gave some countries a shock, but you really should read up on exactly how egregious the Greek borrowing situation was. It was insanely unsustainable. Germany, Denmark, Sweden, France, Slovenia? They'll be fine.
You can't compare the Euro countries to China because the European countries are borrowing in what, in essence, is a foreign currency. For those countries, constant increasing of the debt is hardly sustainable.
China has not that problem. The only danger for China is inflation (that can be controlled with, for instance, taxes), otherwise, the People's Bank of China can buy directly the debt and nothing would happen. In fact, they could just stop emitting debt, but that would be inconvenient for banks and other big investors.
Private and local government debts is a different issue.
China is (officially) growing at ~7% per year right now, so adding $700 billion to their debt pile barely changes the debt/GDP ratio, it might even still fall but I'd have to check the exact figures.
The official reported rate is less than 7%, the actual rate is probably 5-6%. But the problem is the growth of debt, not its absolute value. They most definitely have to hit the brake on growth sometime soon, or they are screwed. Even the Chinese governmebt states this, we are only debating the consequences of hitting the brakes, not whether it will happen or not.
If a government prints its own currency there's not even a theoretical limit to the total amount it can borrow.
There is a limit to the total rate of government spending - spending beyond the rate of the economy's ability to produce - which causes hyperinflation. That is unrelated to the deficit though (theoretically it could even happen in surplus e.g. if you destroyed all your factories and farms).
Why conquer when you can invest? They're investing. It's working. We're happy to have chinese investment in all spaces, ag, and mining, we buy the goods and we sell the dairy produce.
The real threat is Tasmania: haven't you seen the wargames maps? We need those US-Chinese troops to fight back against the daemon armies from cradle mountain.
I've taken the train across china from Hangzhou to Beijing and there is no lack of living space, or empty housing from the speculative bubble. The threat of south-irian is basically the classic yellow-peril threat model.
Its a really bad argument. As long as we are happy to export tertiary education and then proffer immigration channels, there is no basis to argue the Chinese polity wants to invade: it can get people here legally, for good benefit both sides.
Pleae, don't feed the racist troll. The chinese are not swamping us and they cannot cause earthquakes by jumping up and down at the same time.
> I've taken the train across china from Hangzhou to Beijing and there is no lack of living space, or empty housing from the speculative bubble.
The point of the parent's reference isn't to a lack of actual space, it's to Germany's complaint in the 1930s of not having enough Lebensraum: https://en.wikipedia.org/wiki/Lebensraum
... which was similarly spurious -- the Germans had plenty of room for their population too. Lebensraum wasn't about actual space, it was about imperalism, about the Germans feeling strong enough to grab territory from their neighbors just because they could. One could be forgiven for looking at China's military expansionism in the South China Sea, for instance, and thinking the Chinese polity is feeling the same way.
Specious though the south china sea argument feels to us, Its entirely consistent with a long held vision of China and its sphere of influence. What rankles, is the extent to which the opposition to it, the open-seas sailing policy, is being taken by actors (the US, Australia) who chose otherwise to disregard mediation and international law in matters of their own spheres of influence: East Timor for instance. This is not whataboutism, its directly relevant, contradictory behaviour. The Chinese have a long standing stated claim to the spratleys (which btw, I think is entirely bogus) but in no sense simply emerged into a state of claiming them in recent times. The laws being used to push back, are entirely a product of the post-WWII polity, were an attempt to construct a legal mechanism to mediate between states, which is being (forcefully) applied here by some states, who choose to disregard the same legal basis when applied to cases of their own.
Lebensraum was a manufactured need of political expediency and an explicitly expansionist act. The South China Sea is not lebensraum, its open-fishing rights, and over-flight and sailing rights, and mineral rights. It's also a vision of a defensive ring.
You know, that domino theory we used to be sold about chinese expansionist policy in S.E. Asia? its being played in reverse: they need this barrier, because we are trying to re-apply opium war logic to opening chinese capital investment markets, and land in China...
My tasmania comment is about what the US-AU army wargames used to use as the hypothetical invader. they were briefly stupid and used a map of indonesia because of jokes about west irianjaya and 'south iriyan' -and then changed to use the map of tasmania (which btw, is a euphemism for female pubic hair) upside down as the notional invader.
the other reference is to turn-by-turn games of war on maps (I think)
It is for domestic consumption, and much like Japan it is generally being held domestically. They are indebting themselves to themselves tremendously and (as is in the case of Japan) it's not necessarily a bad thing.
The story looks similar too, which is why the CPC is shifting to encouraging demographic growth (including strongly incentivizing young professionals to form families.)
Government debt, much like large corporate debt, almost always takes the form of bond issues. By definition, to raise debt capital via a bond issue someone needs to buy those bonds. Buying bonds is buying debt. Thus, governments cannot raise money through debt issues if people are unwilling to buy the debt.
And this is why credit ratings matter. Because for people to buy the bonds the credit rating needs to be high to keep the yield (interest) low.
If a country receives a less-than-stellar credit rating, the only way they can entice people to buy their bonds is by offering higher yield (interest rate) which means they have to pay back more.
In July 2012 the credit rating for many Euro countries was low and the borrowing costs very high.
Mario Draghi, the President of the Central European Bank (who can emit so many Euros as they wish with typing something in a computer) made a statement (1) that he will defend the Euro.
The next day the debt problem was solved.
'The markets' know that governments that emit debt in their own currency, are not depending of ratings or people buying bonds because they control the currency.
The European case is complicated because the Euro is kind of a foreign currency for the Euroarea, but the China case is obvious.
Over half of US debt is held by Federal retirement funds -- e.g. Social Security. So you put that money away for your retirement, and that retirement fund automatically buys close to no return t-bills. It's all really a giant pyramid scheme, and is only tenable with unsustainable population growth. The US can run an enormous deficit for as long as they can convince the population that their retirement funds should pay for today.
Savings bonds end up being the poster child of the debt, but less than 1% of the debt is actually bonds like that.
It’s more like the other way around: the USA must run large deficits so that massive retirement savings have somewhere to go. Money can’t be saved without being lent. The only question is whether retirement savings are better invested with the us government or more privately like in a 401K (this is what Bush 43 wanted to do with his SS reform).
Supply is just as important as demand when looking at debt.
This is what all the China fear mongers don't get. China has in reality zero external debt when you consider their real, income-producing over seas investment. China's extraordinary growth is not being financed by overseas investors. (Just the opposite, China itself is aggressively investing over seas.) All of this is being financed by the Chinese people themselves. No other country in the world had been able to so successfully boot strap their own economy with so little help.
Almost nobody here is interpreting this correctly. Debt gets sold, and buyers are signaling that they believe they will be repaid in an adequate manner (stable government, currency) and that maintaining reserves to the currency of that nation is desirable.
This is exactly what you expect to see happen as China further eclipses the US as the world's largest economy and the renminbi supplants the dollars as the choice of reserve currency.
It is not the case that nations with lots of debt always collapse. EG, since inception the US has always had debt at the Federal level, except when Andrew Jackson paid it off, which was economically disastrous and plunged the country into a 6 year long depression.
If you include HK and Taiwan, they own a whopping $1500 billion in US debt via treasuries. But these are just savings instruments for them, a way to deal with excess foreign reserves without messing with their own exchange rates. It isn’t like the USA is begging them to buy treasuries, more like treasuries are provided as a service that makes the dollar so useful in trade.
The yuan does not provide the same service to other countries, nor could it since it isn’t fully convertible anyways.
The dollar is the petrocurrency because it is fully convertible and because the US government will always trade it for treasuries (no matter how much), not the other way around. It is extremely safe and liquid, so everyone (even China) uses it for trade.
It it like using LOC towards judging the complexity of a code base :
"God 100K ! your code must be filled with so much boiler plate !"
- During the Second World War Britain / US went deep in the red to fund their survival, I wonder if anyone
though "We cannot afford to go into debt to defeat the Nazis !".
- Debt and deficit by itself is neutral - being a creditor is not inherently a good thing just like being
a debtor is not inherently a bad thing.
- If you look at the list of countries that have the lowest debt / Gdp ratios you will find its mostly low income, low productively countries, the question is not "damn how do they not need credit !" but "why are creditors
not willing provide credit to these countries".
- A country with high deficit is also a country with either high FDI or high rate of internal investment, its
just doesn't sell as good a headline to say that though.
- For China is makes sense since they are quickly ageing, so the current cohort of working age people will
have high savings to draw down from at old age, same for the US / Japan / EU.
- The big question is what does the saving and investment get you ? Is it to fund foreign wars like Vietnam during Nixon, real estate speculation, education for the next generation ?
- The world is awash with credit and savings due to rise in income across all of humanity, driving down interest rate, its a good time to be a debtor and a awful time to a creditor (only generally, if you are a creditor/debtor in the payday loan sector then the inverse applies ).
I don’t know if this is true anymore, but isn’t Chinese private borrowing staggeringly low? And hasn’t American private borrowing jumped up again after the crash?
Looking at public numbers by themselves does not tell much of a story.
That means that China can invest in infrastructure (roads, trains, airports, education) which have high real return making the increase in debt much less of a problem. This is also the reason why China has grown persistently 7-10% over the past two decades compared to USA which have grown 2-3% in the same period.
Per person China's GDP is less than a fifth of the US hinting that this still has some way to go.