The US national debt now stands at about $31 trillion. $31,571,627,957,068 to be exact. At least, that was the exact figure when I started to type this sentence a few seconds ago. By the time I finished the sentence, we owed more.
$31 trillion seems an impossibly large figure; almost beyond human comprehension. Here’s one way to think about it: if the US paid off $100 of this debt every second, it would take over 10,000 years to fully repay.
As one host of the Daily Show recently summed it up: “America is so broke, the government might have to resort to extraordinary measures, like taxing the rich.”
How do economists evaluate national debt? Most start by dividing each country’s debt by the size of its economy, as measured by GDP. (GDP – gross domestic product – equals the total market value of all finished goods and services produced within a country’s borders, typically in one year.) For the US, debt divided by GDP is about 123%. In other words, we owe more than the entire US economy produces in a year.
In a shocking turn of events, economists can’t seem to agree about whether that’s a problem. As Harvard professors and former White House economists Jason Furman and Larry Summers put it in an article in Foreign Affairs: “In truth, no one knows the benefits and costs of different debt levels—75 percent of GDP, 100 percent of GDP, or even 150 percent of GDP.”
However bad the US debt problem turns out to be, debt is worse in China. In fact, “China’s debt… is one of the biggest economic challenges confronting the ruling Chinese Communist Party.”
Exactly how much does China owe? Here’s where it gets really complicated. Different sources will give you significantly different answers about the total size of China’s national debt. Due to the lack of transparency in Chinese financing, nobody outside China really knows how much money the country owes. In fact, bankers and politicians have done such a good job of hiding debt and blowing smoke, that probably no one inside China is quite sure either.
An online site called “China’s national debt clock” puts the total amount at $9.4 trillion, or 63% of China’s GDP. However, that website goes on to note in large print that “We suggest you multiply [this figure] by at least 3.25 [to include]… local government financing vehicles… Then consider adding [an additional amount] for China’s shadow banking (loans outside of formal banks).”
The term “local government financing vehicles” refers to a wide variety of Chinese financial instruments which fund national initiatives such as infrastructure development. Under the US system, this type of spending would appear as part of the national debt. However, “China has historically kept central government borrowing down by shifting the fiscal burden to local governments… [where] opportunities for creative debt management seem to be greater.”
The result? According to a CNN article a few weeks ago, “even the country’s top officials have admitted that one of the biggest threats to financial stability in 2023 is hidden local government debt, which is opaque, huge and hard to track.”
Add to this the “shadow banking system” which was designed to enable bankers to hide bad debts outside bank regulations. For example, some banks have re-packaged and sold their bad debts as securities. As a result, those repackaged debts have disappeared from the banks’ balance sheets and from official estimates of national debt.
Any discussion of US vs Chinese banking systems must also keep in mind the fact that as, explained in a previous post, the Constitution of the Communist Party of China specifically states that “the interests of the Party and the people come before all else.” As a result, Chinese bankers “often make decisions based on government edict rather than economic pragmatism. This includes loaning money to state-owned, state-controlled, or state-favored companies and industries in spite of the risk that the money may not be repaid.” (Digression: If you are ever tempted to invest in high interest bonds offered by Chinese banks, keep this in mind. While US banks are committed to maximizing your profit and theirs, Chinese banks are dedicated to financing CCP initiatives.)
The resulting “mountains of debt” have set the stage for problems which are just starting to affect the lives of ordinary Chinese citizens.
For example, last year China “experienced its first wave of bank runs, triggered by frozen deposits in online accounts worth… $6 billion and affecting 400,000 depositors… Not being able to withdraw their life savings has led to protests by depositors, triggered panic over the solvency of small banks, and increased the nationwide risk of runs on small banks.”
The Chinese government is currently drafting a new financial stability law which is “likely [to be implemented] this year.” The current draft includes “emergency funding to weak banks to preserve system financial stability.”
Another problem is that the finances of some municipal governments have gotten so bad that they are unable to pay for basic services. “As the financial pressure has mounted, regional governments have reportedly been slashing wages, cutting transportation services and reducing fuel subsidies in the middle of a harsh winter.”
Still another problem started in the real estate sector, which has been over-building new apartments for many years, as a result of government policies to keep the economy growing at all costs. In 2021, I wrote in this blog about a failure to make debt payments by Evergrande, one of the largest developers in China with more than 1,300 projects in 280 cities. With over $300 billion in excess debt, they no longer had enough cash to finish building some developments, and were unable to repay the deposits some buyers had made on their unfinished apartments. In that 2021 post, I also reported then that the owners were promising that they would soon announce how they would restructure the debt to minimize the damage. In the 18 months since, Evergrande executives have continued to promise that a plan is coming soon. Meanwhile, they have missed several self-imposed deadlines. And many individuals who put money down are still waiting to hear what will happen to their deposits.
Of course, the US has not yet experienced problems this extreme, despite its own enormous debts. One reason is that the US dollar is the largest reserve currency in the world. Most international trades are based on dollars, and 51% of the reserves held by central banks around the world are in dollars. In comparison, just 2% of international reserves are held in China’s renminbi or yuan (Dalio, p. 441). The rest is held in Euros (20%), gold (12%), Japanese yen (6%) British pounds (5%), and other currencies (4%).
The simple fact that the US borrows in dollars and pays off in dollars gives it an enormous advantage. As a last resort, it can pay its debts by printing more dollars. Which is essentially what the US has done as our national debt has increased from $19.6 trillion in 2016 to $31 trillion today. How did it go up so fast? Feel free to blame Congress, on both sides of the aisle. In 2017, Republicans increased the debt with tax cuts that “overwhelmingly benefited wealthy shareholders and highly paid executives.” In 2020 and 2021, Democrats spent several trillion more to reduce the impact of covid and to rebuild US infrastructure. The fact that the country essentially “printed more money” to finance these laws led to widespread inflation. Which is why the price of a dozen eggs has increased from $1.38 at the end of 2016 to $4.82 today.
The “good news” is that most economists agree that China’s debt problems are worse than ours. But they disagree about exactly how much worse, or how much it matters. Deficit fundamentalists fear that China, the US and many other countries are headed into debt traps which will reduce economic growth. When an economy slows, it reduces tax revenue, which further increases debt until it spirals out of control. In contrast, proponents of what is called Modern Monetary Theory argue “that governments that borrow in their own currencies [such as the US] have no reason to concern themselves with budget constraints.”
Ultimately, how will we know which group is right? When there is a major debt crisis. Until then, governments are likely to keep kicking the can down the road, borrowing and spending freely to meet their goals.
As discussed in my previous post, after analyzing several hundred years of world economic history, billionaire investor Ray Dalio has concluded that repeated up and down debt cycles like the current one are an inevitable consequence of human nature. As countries become richer and more powerful, he wrote in “The Changing World Order: Why Nations Succeed and Fail,” their people “tend to not work as hard, enjoy more leisure, [and] pursue the finer things in life… [As] people get used to doing well, they increasingly bet on the good times continuing—and [they] borrow money to do that—which leads to financial bubbles.” (p. 47)
Which debt bubbles will pop first, and when? I guess we’ll just have to wait and see.