I'm not sure - it will, however, make it more expensive for the US to sell new bonds. (Why lend Uncle Sam $100 at a 1% interest rate, when you can buy a piece of paper that says Uncle Sam will pay you $100 next year for $98 from China?)
But they can take their army to a delicate border - say with Pakistan, India, and at the straight, and if they ask North Korea nicely maybe they will be able to get to the SK border, and ask for their money back with the PLA standing by.
A holder of government debt can have much sharper knives than a loan shark.
> A holder of government debt can have much sharper knives than a loan shark.
Actually, the difference you point to is really with a government holder of debt (regardless of whether the debt is government debt), not with a holder of government debt.
Confusion between a government holding debt, and a holder of government debt notwithstanding, a state actor can also hijack an airplane and ask for a billion dollars, or they will kill a hostage every 30 minutes.
Or, they can threaten to nuke South Korea if you don't send them food.
As it's not ran by people with the financial and diplomatic acumen of either the Tea Party, or the Kim family, China's not likely to do either.
Unless the loan shark is the IMF, the ECB, and the EU, in which case it can park (financial) tanks outside the banks of the debtor country and threaten to rain financial death on it.
That's unlikely to happen in China's case - but we're in novel territory politically and economically, so I think it's impossible for anyone to guess how it will play out.
The very first sentence of the linked Wikipedia article.
"The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP) as of Q1 2014."
Unless China follows the playbook laid out by Tom Clancy in Debt of Honor. :-O
Facing an economic crisis, Japan's ruling corporate cabal, led by Yamata, decides to take military action against the U.S. Along with covert support from China and India, they plot to curtail the American presence in the Pacific and re-establish the Greater East Asia Co-Prosperity Sphere.
Both China and Japan have extremely high amounts of debt relative to GDP, and are both are still increasing spending.
Short term, the Chinese stock market will continue to fall - it's still incredibly overvalued from the bubble. US and European stocks should continue to be slightly affected. Anyone with a clue has already priced the Chinese effect into stock prices.
Short and mid term, any money that can will continue to attempt to escape China. Land/Houses/Industries in popular areas may be a little overvalued in the popular places in the US and Europe.
Until tech ecosystems outside the area are comparable there will probably always be waves of new people willing to give it a try to counter those moving somewhere more affordable.
Land values are not about lifestyle and preferences, they are about interest rates, scarcity, and proximity to economic production.
As services and particularly technological services become more important and create more value, the value of land proximate to these activities will continue to increase, because the business depends on talent, and network power i.e. relationships with other individuals (which require proximity). As for interest rates, I forecast they stay low for decades as inflation will remain suppressed.
There could be several cyclical downturns along the way but I can't see any way land values in the Bay Area don't appreciate at an annual rate greater than national CPI ~30 years from now.
You are seeing implications already with declining commodity prices.
I just read that house prices in Sydney, Australia are dropping month by month for the first time in very very long time.
Probably more things if you look around a bit.
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I don't think we will see the growth rates in China drop below 5% as the growth is very different from what we have in the west. Essentially it is the rapid modernisation of an economy via strict central governance.
Think about it. Why would the GDP pr person in China be much different from the GDP pr person in Taiwan?
China will continue to have "supernatural" growth for the next many years.
If China is in debt to China in Chinese currency the Chinese state has very good leverage to handle the situation. It could even make the debt disappear.
That probably means that China has no problems paying back debt denominated in US$.
I don't know about the dynamics of this selloff. It's very hard to argue without seeing the whole picture but it indicates that _something_ is going on.
The debt is substantially owed by local Chinese governments, SOEs and developers to Chinese banks.
The central government could:
1) Transfer the debt to itself (a bailout) this leaves the central government with a very high (although sustainable) debt load but doesn't address any of the underlying problems.
2) Inflate the debt away. This doesn't address any of the underlying problems but it also impoverishes a lot of people who thought they were doing well. It also increases capital flight pressure.
3) "Stress test" the banks, requiring loans in arrears be paid, bad loans be written off, stopping the process of sending good money after bad. This is the only move that address the underlying problems, but it means the banks collapse (because they're already insolvent), the SOEs go bust, plus the problem of insolvent local governments would have to be addressed; people lose their old age pensions, massive unemployment. Plus most of the PRC's members wealth is in SOEs so this will affect them personally. Also the government will have to recapitalize the banks if it wants a financial sector at all (see option 2).
4) Claiming to do 3 while actually doing a combination of 1 and 2. This is probably what they will do and if they succeed, at the end of the day, the can will be a little further down the road.
Seems irrelevant because like any country with a sovereign currency they can just print more money if they want to. It's a much bigger problem if you have debt and can't print your way out of it (for example Greece).
"Printing your way out" isn't really a solution, either.....Zimbabwe tried that for a while, but gave up after inflation hit 80 billion percent per month.
Prices would literally go up two or three times a day. If you had Zimbabwe dollars, you would try to get rid of them as fast as possible, either by exchanging them on the black market, or by buying something. If you waited until the next day, you would lose a lot of money.
Hyperinflation (Especially unrealiable hyperinflation) is an untenable state of affairs. Nobody lends, hedging is impossible, and cash becomes worthless.
Moderate amounts of inflation (Under 10%), on the other hand, has worked 'fine' for the better part of a century.
Printing money is not the only option, governments can devalue their currency instead and China is already doing it. Greece, of course, has none of these options.
This is an older article from the beginning the the month as China was really struggling with its stock market. As others have pointed out, debt, in itself, isn't really an "issue" so much as it is money from the future being brought into the present. And when the future has a lot more money than the present does, sending that money into the past isn't a drag on the economy. But when the economy is about the same size in the future as it is now, then that future economy is going to have to figure out how to operate without all that moeny it sent to the past.
For the government debt it isn't a huge issue because the Government can essentially decide not to pay itself back. But for public debt it means that the economy is held back. Imagine if the trillions of dollars corporations in the US are currently holding in "cash" was all going to paying off previous bond holders. That money would not be available for acquisitions or new investment. So those companies would grow slowly or not at all.
Can you explain the "money from the future" thing?
The only money that I know is a) a metal coin and b) a contract. Now, the contract naturally deals with future expectations as does the stock market. The stock market, however, does not create money. It distributes money.
One problem that arises in this regard is making contracts about money (which is other contracts). When the expectations fail, the contracts fail and if the contract was used to create money, you now have a problem. The money supply ultimately shrinks and the contracts about money start to fail. This is usually the point where the government announces big spending programs to lessen the pain.
You may ask where does the government get that money?
There are two fundamentally different methods.
1) from people who accumulated money. They give it to the government and the government spends it. In turn the government needs more money to pay those people back.
Does the money supply increase this way? Kind of, but not really. It just helps to bring existing money back into circulation but does not create new money. It is therefore only a temporary fix. One day the government will stop paying those people back.
2) The government just creates new money. They can do this if they control the currency (sorry, Greece). The dangerous part about this is that it is so easy to create new money once the dam has been broken and this new money isn't backed up with value. When this goes out of hand it leads to hyperinflation (as in Germany 1920s) where the currency is devalued.
By having a really strong and reasonable government, you can force 1) at low cost and control 2) without going overboard. China might be in a position where they can do that for a long time.
"Money from the future" is a way of describing using future GDP to pay for current goods. Its a bet that what ever you are using the money for will result in a way to pay it back in the future while still benefiting from the investment.
Simple example: I borrow $50,000 from a bank to open a restaurant.
Lets split that into two bets:
First, I bet that from my future revenue, I'll be able to pay back the bank and keep operating my restaurant. So in my own time line if you will I am taking money I'll be earning from paying customers in the future and using it in the present to actually build my restaurant. The way I do this is with a bank.
Second, the bank kind of believes and kind of doesn't believe that I can pay it back. So it says "we'll take some money we have laying about and give it to you to open a restaurant, but you have to pay it all back to us in 10 years and every year we want an additional 7.2% from you. What that means is that after 10 years you will have paid them back double the amount of money you borrowed.
So I've taken $50,000 of my future revenue, and turned it into a monthly obligation to the bank of $834. So if I sell my pies for $8.34, the first 100 pies of every month end up having all that money going to the bank which loaned me the money. So in my "present" money is going to pay off my "past" borrowing. Had I not taken the loan that $834 would go right into my pocket.
In a Macro Economic sense, if you take on debt, and invest the capital represented by that debt to grow the economy, then in the future the larger economy, some of the GDP is going to servicing (or paying off) that debt rather than additional growth. If your economy cannot sustain that drag (debt service) then it tends to contract, which makes it even less able to support that drag. If you read George Soros he will tell you that any day now the entire world is going to implode in just that fashion :-).
The careful thing you have to watch out for is talking about "money" which everyone thinks of as bills and coins or balances in a bank account, and "GDP" which is essentially the "value" created by all of the economic activity in an economy. Governments try to manage their economy to grow its GDP, and because transactions in the economy are often (but not always!) transacted using the national currency, economic figures are often reported in terms of dollars or yuan or yen or what have you. But you have to remember that you can have an economy that doubles in size, the the size of the monetary denominational transactions might be the same, more (inflation), or less (deflation).
China is in the situation of trying to show the world a growing GDP (their economy). They have a spotty track record when it comes to how accurately they compute that :-) but fundamentally if they cannot actually grow it, then the debt they hold which they created in order to grow, will not be serviceable without shrinking the size of their economy. The traditional "fix" for that is that the exchange rate between economic value and currency changes so that the numbers match. China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value.
But what that really means is you aren't selling enough pizzas so you start charging $834 per pizza and just by selling one a month you can meet your monthly debt payment. And the citizen says "Gee, remember when you could get a nice pizza for less than $10? I miss those days."
Thanks for the explanation. I see your point: "Taking money from the future." is a figurative term for "Promising money to someone at a future point of time."
Another thing is unclear now:
> China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value.
What do you mean with "allow to inflate"?
Inflation is growth of the amount of money == new debt needs to be created. How is this done? Who takes on new debt?
One day, you get a pay cut of 20%, and you choose to stay in your job.
You don't have enough income to cover your expenses. So you make a deal with yourself to borrow from your retirement fund, at 5% interest. You tell yourself you will pay it back eventually.
Month after month, you borrow from your retirement fund, which dwindles slowly.
Your retirement fund's balance sheet looks fine, because you're still accumulating assets, like the loan it made to you, which is growing in value by 5% per year.
You are also accruing a lot of debt to yourself, in the meantime.
One day, you find yourself having so much debt to yourself, you can't service the 5% interest rate.
That's when you face the music and realise you've spent all your capital away.
That's what "Taking money from the future" means.
That's what's happening when a country lends lots of money to itself, and eventually has a debt problem.
It's also what's happening when Social Security is "investing" in government bonds, investing in a government that's never repaying it's loans.
Where did that spent capital go in China? Concrete buildings.
5% turns out to be too much -> you lower it to 4%. You simply legislate this.
You loan more. Until 4% is too much as well ...
4% too much ... 3% ... 2% ... 1.5%
Once you go below a reasonable chance of non-repayment (countries have survived on average ~60 years, because a lot were "interrupted" or ... during WWII and a lot of debt was "forgiven" at the point of a gun)
Now you're a country ... so you legislate that people loan you money, making it sound vaguely reasonable by saying that's what they're paying for FDIC insurance (or equivalent, in Europe). Of course you don't have the money, nor the ability to borrow the money, that you'd need to actually satisfy a "real" FDIC incident (one component of "too big to fail" banks).
The banks realize that you've done this, so what do they do ? They borrow massive amounts of money to one another. Why does this help ? Well it guarantees that anyone who's done this borrowing of large amounts of money can't be thrown under the bus. Why not ? Because if one of them goes down, it will take down others (by not repaying the loan). So the government is forced to save even the ones where the FDIC reserves might actually suffice. Also, you pay out this loan to your shareholders and management (to yourself, essentially).
1.5% ... 1% ... 0.5%
The banks are losing money, because they can't convince investors their loans are probably backed. But you're a government ... you simply legislate that these companies that loan you lots of money exist, and you save them. And then they take more risk, and more risk, and fuck up, and get bailed out, and take yet more risk, maybe get bailed out a bit more. Your interest rate devaluations let you borrow more, but you have to use it to save the "too big to fail" banks/companies.
Note that the government is not innocent in the risk taking : because the government is effectively taxing loans (by making sure they can't get a proper risk premium, and have to loan to the government -> other parts of the bank need to make enough profit to make up).
And of course you're still borrowing money for the reasons you started to borrow money.
0.5 ... 0.25 ... 0 ... -0.05 ... -0.3%
Now you're having the problem that these banks are bleeding money - fast. And they can't charge their customers, because they can simply withdraw money and keep it in their mattress.
So you ... well this is where we are today ... what's next ? Outlawing cash, gold, a lot of types of stock, and directly taxing all bank deposits is the obvious answer. And the only other option is to lower global government expenses by ~12%. Essentially a wealth tax.
There is of course another option: if they don't make a choice there is one other solution : having 10%+ inflation in Europe and America. All mortgages at 15% for a year or two and just deal with the miser that'll cause. This is what will happen "by default": if the central banks fail to agree on a course of action.
Traditionally the tool governments used to "manage" inflation was interest rates with the central bank. The central bank lends money to regional banks which can then lend it to industry or people. Lower the rates, more money flows into the economy[1], labor shortages and goods shortages drive up prices[2]. Voila, inflation.
[1] We have an interesting (if not unprecedented) situation in the USA where low interest rates have resulted in capital accumulation at companies rather than investment, and stagnant wage growth. It is, at Tim Geitner once said, "The part of the economics textbook that hasn't been written yet." And while I got to experience the "unheard of" condition known as "stagflation" (a stagnant economy but high inflation" my kids get to experience this thing we're currently experiencing. If it turns into a deflationary spiral it will mean that things like real property prices will go down.
[2] Much of the housing bubble has been blamed not only on lowering standards for mortgages but also the lower costs of mortgages which means the same house can be priced higher and still be affordable by the target buyer.
For the government debt it isn't a huge issue because the Government can essentially decide not to pay itself back. But for public debt it means that the economy is held back.
"Public debt" is another name for "Government debt"[0]. From the rest of your description, you means "debt owed by the non-government public", private debt, or "household debt" (which doesn't strictly include corporate debt like your example outlines).
Absolutely, I'd edit the post but rather that acknowledge the gaff here. Debt the government owes to itself it has a number of ways to manage, debt between private entities is a much harder thing to fix without tanking the economy. The canonical example these days is the subprime mortgage crisis.
What about a Chinese multinational that has offices all over the world, and has incurred debt all over the world? Is all their debt considered as Chinese debt?
Thanks. But that's a very fuzzy concept innit? After all, currencies are convertible and fungible. All that it really implies is that the high debt levels will likely keep the value of the Yuan low.
On a separate note, can some foreign company or government issue debt instruments denominated in Yuan? Why not? It's a convertible currency after all...
China is impervious to any amount of debt and should let it all default right away. Normally if you are heavily in debt say you have a bad credit score, no one will want to lend to you. However if you have a bad credit score and millions of people moving from poverty to the middle class and companies around the world want to sell to them... that is a different story altogether. It is not like there is another market like China available. China is the only growth market available, anywhere. Companies are so desperate to sell in China they have transferred all of their intellectual property to companies inside of China for the privilege even though it will destroy the companies in the long run.
No, right now India doesn't have a growth mindset because of their many laws and probably corruption. Africa is not stable enough for meaningful growth however... China is doing their best to change that and make Africa a growth market for them by working with stable dictators no matter how brutal and terrible they are.
This is probably what China should do, but like any other nation in the world they will not do because of the high political cost. The most likely scenario for China is that they will maintain this debt forever, by constantly devaluing the currency just to let the state-owned companies survive.
For a good context on this, I would highly recommend "The Global Minotaur" by Yanis Varoufakis. It really changed my understanding of the use and flow of debt, specifically sovereign and institutional debt.
This article: "How China accumulated $28 trillion debt in such a short time." At the bottom it says "Now watch: China is immortalizing its founding leader with an enormous 121-foot gold-plated statue."
I guess the second headline answers the first headline's question.
From what I understand (something may be getting lost in translation)
- The increasing debt is being used to keep up growth
- The growth that is being bought by the debt isn't enough to service the debt
- Some sector of the economy will have to pay for it, because growth will wither until it is paid.
Quoting: China is also constrained from reducing the debt burden though monetization, financial repression, or taxes on households because in each case the cost is indirectly allocated to the household sector, which simply exacerbates the original imbalance. This leaves only two alternatives. First, Beijing can expropriate the wealth of small and medium enterprises directly or indirectly (in the latter case by raising taxes), although this means undermining the most productive part of the Chinese economy. Second, Beijing can liquidate government assets and use the proceeds to pay down debt. There are no other plausible options.
edit:
also: the process of deciding who gets forced to bear the debt will be highly politicized and contentious. The blog post explains how there are strong negative consequences to each choice.
Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy.
There are a couple of reasons why. The U.S. has enormous energy reserves and will in the long run emerge as the major energy exporter in the world, helping reverse the perennial balance of trade deficit to a surplus, potentially $500 billion to a trillion annually.
Also, Chinese wages are rising even as manufacturing technologies such as 3-D printing and other software-driven approaches are helping bring factories back to the West. The Chinese model of cheap outsourcing is just about tapped out or will be in the next ten years.
"Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy."
A lot of it is news hype. Disaster sells stories, a "2% decrease in growth" doesn't. The US wasn't doing badly a few years ago, and China isn't doing all that badly now.
Something to remember when the hype and stories come up in the next few years. We'll all muddle through, just like we always do.
"Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy."
A lot of it is news hype. Disaster sells stories, a "2% decrease in growth" doesn't. The US wasn't doing badly a few years ago, and China isn't doing all that badly now.
Something to remember when the hype and stories come up in the next few years. We'll all muddle through, just like we always do.
Here's my anecdote about taxes and finance in China after spending ~5 years working there.
I have a number of friends there who are entrepreneurs/small business owners in China. Over the past few years, they have regularly been "asked" by local government to pre-pay the current year's taxes. One friend has now pre-paid three years' worth of tax after successive approaches by tax authorities. (The conversation went like this: "We need you to pre-pay this year's taxes." "But I already did." "Then you can pre-pay for the coming year.")
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[ 3.0 ms ] story [ 149 ms ] threadSo is this referring to debt that America owes China?
What they can do is start selling the debts they own for cash on the open market.
A holder of government debt can have much sharper knives than a loan shark.
Actually, the difference you point to is really with a government holder of debt (regardless of whether the debt is government debt), not with a holder of government debt.
Or, they can threaten to nuke South Korea if you don't send them food.
As it's not ran by people with the financial and diplomatic acumen of either the Tea Party, or the Kim family, China's not likely to do either.
That's unlikely to happen in China's case - but we're in novel territory politically and economically, so I think it's impossible for anyone to guess how it will play out.
They don't go around demanding that the interest and the principal on a bond due 20 years from now gets paid tomorrow.
For comparison, the US is at a debt to GDP ratio of 270+%.
The public + private US debt/gdp ratio is ~270%.
https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...
https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...
"The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP) as of Q1 2014."
China still holds large amounts of US debt. Refinancing US debt might become problematic if the Chinese need to stop lending.
Facing an economic crisis, Japan's ruling corporate cabal, led by Yamata, decides to take military action against the U.S. Along with covert support from China and India, they plot to curtail the American presence in the Pacific and re-establish the Greater East Asia Co-Prosperity Sphere.
https://en.wikipedia.org/wiki/Debt_of_Honor
Short term, the Chinese stock market will continue to fall - it's still incredibly overvalued from the bubble. US and European stocks should continue to be slightly affected. Anyone with a clue has already priced the Chinese effect into stock prices.
Short and mid term, any money that can will continue to attempt to escape China. Land/Houses/Industries in popular areas may be a little overvalued in the popular places in the US and Europe.
As services and particularly technological services become more important and create more value, the value of land proximate to these activities will continue to increase, because the business depends on talent, and network power i.e. relationships with other individuals (which require proximity). As for interest rates, I forecast they stay low for decades as inflation will remain suppressed.
There could be several cyclical downturns along the way but I can't see any way land values in the Bay Area don't appreciate at an annual rate greater than national CPI ~30 years from now.
I just read that house prices in Sydney, Australia are dropping month by month for the first time in very very long time.
Probably more things if you look around a bit.
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I don't think we will see the growth rates in China drop below 5% as the growth is very different from what we have in the west. Essentially it is the rapid modernisation of an economy via strict central governance.
Think about it. Why would the GDP pr person in China be much different from the GDP pr person in Taiwan?
China will continue to have "supernatural" growth for the next many years.
* Who owes to whom?
* In what currency?
* How could it be enforced?
If China is in debt to China in Chinese currency the Chinese state has very good leverage to handle the situation. It could even make the debt disappear.
1: http://www.bloomberg.com/news/articles/2015-10-18/china-s-se...
I don't know about the dynamics of this selloff. It's very hard to argue without seeing the whole picture but it indicates that _something_ is going on.
The central government could:
1) Transfer the debt to itself (a bailout) this leaves the central government with a very high (although sustainable) debt load but doesn't address any of the underlying problems.
2) Inflate the debt away. This doesn't address any of the underlying problems but it also impoverishes a lot of people who thought they were doing well. It also increases capital flight pressure.
3) "Stress test" the banks, requiring loans in arrears be paid, bad loans be written off, stopping the process of sending good money after bad. This is the only move that address the underlying problems, but it means the banks collapse (because they're already insolvent), the SOEs go bust, plus the problem of insolvent local governments would have to be addressed; people lose their old age pensions, massive unemployment. Plus most of the PRC's members wealth is in SOEs so this will affect them personally. Also the government will have to recapitalize the banks if it wants a financial sector at all (see option 2).
4) Claiming to do 3 while actually doing a combination of 1 and 2. This is probably what they will do and if they succeed, at the end of the day, the can will be a little further down the road.
5) Do nothing about the problem while attempting to hide as much as possible, silencing any whistle-blowers or sources of accurate information.
Prices would literally go up two or three times a day. If you had Zimbabwe dollars, you would try to get rid of them as fast as possible, either by exchanging them on the black market, or by buying something. If you waited until the next day, you would lose a lot of money.
Moderate amounts of inflation (Under 10%), on the other hand, has worked 'fine' for the better part of a century.
For the government debt it isn't a huge issue because the Government can essentially decide not to pay itself back. But for public debt it means that the economy is held back. Imagine if the trillions of dollars corporations in the US are currently holding in "cash" was all going to paying off previous bond holders. That money would not be available for acquisitions or new investment. So those companies would grow slowly or not at all.
The only money that I know is a) a metal coin and b) a contract. Now, the contract naturally deals with future expectations as does the stock market. The stock market, however, does not create money. It distributes money.
One problem that arises in this regard is making contracts about money (which is other contracts). When the expectations fail, the contracts fail and if the contract was used to create money, you now have a problem. The money supply ultimately shrinks and the contracts about money start to fail. This is usually the point where the government announces big spending programs to lessen the pain.
You may ask where does the government get that money?
There are two fundamentally different methods.
1) from people who accumulated money. They give it to the government and the government spends it. In turn the government needs more money to pay those people back.
Does the money supply increase this way? Kind of, but not really. It just helps to bring existing money back into circulation but does not create new money. It is therefore only a temporary fix. One day the government will stop paying those people back.
2) The government just creates new money. They can do this if they control the currency (sorry, Greece). The dangerous part about this is that it is so easy to create new money once the dam has been broken and this new money isn't backed up with value. When this goes out of hand it leads to hyperinflation (as in Germany 1920s) where the currency is devalued.
By having a really strong and reasonable government, you can force 1) at low cost and control 2) without going overboard. China might be in a position where they can do that for a long time.
Simple example: I borrow $50,000 from a bank to open a restaurant.
Lets split that into two bets:
First, I bet that from my future revenue, I'll be able to pay back the bank and keep operating my restaurant. So in my own time line if you will I am taking money I'll be earning from paying customers in the future and using it in the present to actually build my restaurant. The way I do this is with a bank.
Second, the bank kind of believes and kind of doesn't believe that I can pay it back. So it says "we'll take some money we have laying about and give it to you to open a restaurant, but you have to pay it all back to us in 10 years and every year we want an additional 7.2% from you. What that means is that after 10 years you will have paid them back double the amount of money you borrowed.
So I've taken $50,000 of my future revenue, and turned it into a monthly obligation to the bank of $834. So if I sell my pies for $8.34, the first 100 pies of every month end up having all that money going to the bank which loaned me the money. So in my "present" money is going to pay off my "past" borrowing. Had I not taken the loan that $834 would go right into my pocket.
In a Macro Economic sense, if you take on debt, and invest the capital represented by that debt to grow the economy, then in the future the larger economy, some of the GDP is going to servicing (or paying off) that debt rather than additional growth. If your economy cannot sustain that drag (debt service) then it tends to contract, which makes it even less able to support that drag. If you read George Soros he will tell you that any day now the entire world is going to implode in just that fashion :-).
The careful thing you have to watch out for is talking about "money" which everyone thinks of as bills and coins or balances in a bank account, and "GDP" which is essentially the "value" created by all of the economic activity in an economy. Governments try to manage their economy to grow its GDP, and because transactions in the economy are often (but not always!) transacted using the national currency, economic figures are often reported in terms of dollars or yuan or yen or what have you. But you have to remember that you can have an economy that doubles in size, the the size of the monetary denominational transactions might be the same, more (inflation), or less (deflation).
China is in the situation of trying to show the world a growing GDP (their economy). They have a spotty track record when it comes to how accurately they compute that :-) but fundamentally if they cannot actually grow it, then the debt they hold which they created in order to grow, will not be serviceable without shrinking the size of their economy. The traditional "fix" for that is that the exchange rate between economic value and currency changes so that the numbers match. China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value.
But what that really means is you aren't selling enough pizzas so you start charging $834 per pizza and just by selling one a month you can meet your monthly debt payment. And the citizen says "Gee, remember when you could get a nice pizza for less than $10? I miss those days."
Another thing is unclear now:
> China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value.
What do you mean with "allow to inflate"?
Inflation is growth of the amount of money == new debt needs to be created. How is this done? Who takes on new debt?
One day, you get a pay cut of 20%, and you choose to stay in your job.
You don't have enough income to cover your expenses. So you make a deal with yourself to borrow from your retirement fund, at 5% interest. You tell yourself you will pay it back eventually.
Month after month, you borrow from your retirement fund, which dwindles slowly.
Your retirement fund's balance sheet looks fine, because you're still accumulating assets, like the loan it made to you, which is growing in value by 5% per year.
You are also accruing a lot of debt to yourself, in the meantime.
One day, you find yourself having so much debt to yourself, you can't service the 5% interest rate.
That's when you face the music and realise you've spent all your capital away.
That's what "Taking money from the future" means.
That's what's happening when a country lends lots of money to itself, and eventually has a debt problem.
It's also what's happening when Social Security is "investing" in government bonds, investing in a government that's never repaying it's loans.
Where did that spent capital go in China? Concrete buildings.
5% turns out to be too much -> you lower it to 4%. You simply legislate this.
You loan more. Until 4% is too much as well ...
4% too much ... 3% ... 2% ... 1.5%
Once you go below a reasonable chance of non-repayment (countries have survived on average ~60 years, because a lot were "interrupted" or ... during WWII and a lot of debt was "forgiven" at the point of a gun)
Now you're a country ... so you legislate that people loan you money, making it sound vaguely reasonable by saying that's what they're paying for FDIC insurance (or equivalent, in Europe). Of course you don't have the money, nor the ability to borrow the money, that you'd need to actually satisfy a "real" FDIC incident (one component of "too big to fail" banks).
The banks realize that you've done this, so what do they do ? They borrow massive amounts of money to one another. Why does this help ? Well it guarantees that anyone who's done this borrowing of large amounts of money can't be thrown under the bus. Why not ? Because if one of them goes down, it will take down others (by not repaying the loan). So the government is forced to save even the ones where the FDIC reserves might actually suffice. Also, you pay out this loan to your shareholders and management (to yourself, essentially).
1.5% ... 1% ... 0.5%
The banks are losing money, because they can't convince investors their loans are probably backed. But you're a government ... you simply legislate that these companies that loan you lots of money exist, and you save them. And then they take more risk, and more risk, and fuck up, and get bailed out, and take yet more risk, maybe get bailed out a bit more. Your interest rate devaluations let you borrow more, but you have to use it to save the "too big to fail" banks/companies.
Note that the government is not innocent in the risk taking : because the government is effectively taxing loans (by making sure they can't get a proper risk premium, and have to loan to the government -> other parts of the bank need to make enough profit to make up).
And of course you're still borrowing money for the reasons you started to borrow money.
0.5 ... 0.25 ... 0 ... -0.05 ... -0.3%
Now you're having the problem that these banks are bleeding money - fast. And they can't charge their customers, because they can simply withdraw money and keep it in their mattress.
So you ... well this is where we are today ... what's next ? Outlawing cash, gold, a lot of types of stock, and directly taxing all bank deposits is the obvious answer. And the only other option is to lower global government expenses by ~12%. Essentially a wealth tax.
There is of course another option: if they don't make a choice there is one other solution : having 10%+ inflation in Europe and America. All mortgages at 15% for a year or two and just deal with the miser that'll cause. This is what will happen "by default": if the central banks fail to agree on a course of action.
[1] We have an interesting (if not unprecedented) situation in the USA where low interest rates have resulted in capital accumulation at companies rather than investment, and stagnant wage growth. It is, at Tim Geitner once said, "The part of the economics textbook that hasn't been written yet." And while I got to experience the "unheard of" condition known as "stagflation" (a stagnant economy but high inflation" my kids get to experience this thing we're currently experiencing. If it turns into a deflationary spiral it will mean that things like real property prices will go down.
[2] Much of the housing bubble has been blamed not only on lowering standards for mortgages but also the lower costs of mortgages which means the same house can be priced higher and still be affordable by the target buyer.
"Public debt" is another name for "Government debt"[0]. From the rest of your description, you means "debt owed by the non-government public", private debt, or "household debt" (which doesn't strictly include corporate debt like your example outlines).
[0] https://en.wikipedia.org/wiki/Government_debt
- Debt owed by Chinese citizens?
- Debt owed by companies headquartered in China?
- Debt owed by the Chinese Govt?
What about a Chinese multinational that has offices all over the world, and has incurred debt all over the world? Is all their debt considered as Chinese debt?
[1] http://www.economist.com/news/business-and-finance/21679341-...
I guess the second headline answers the first headline's question.
From what I understand (something may be getting lost in translation)
- The increasing debt is being used to keep up growth
- The growth that is being bought by the debt isn't enough to service the debt
- Some sector of the economy will have to pay for it, because growth will wither until it is paid.
Quoting: China is also constrained from reducing the debt burden though monetization, financial repression, or taxes on households because in each case the cost is indirectly allocated to the household sector, which simply exacerbates the original imbalance. This leaves only two alternatives. First, Beijing can expropriate the wealth of small and medium enterprises directly or indirectly (in the latter case by raising taxes), although this means undermining the most productive part of the Chinese economy. Second, Beijing can liquidate government assets and use the proceeds to pay down debt. There are no other plausible options.
edit:
also: the process of deciding who gets forced to bear the debt will be highly politicized and contentious. The blog post explains how there are strong negative consequences to each choice.
Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy.
There are a couple of reasons why. The U.S. has enormous energy reserves and will in the long run emerge as the major energy exporter in the world, helping reverse the perennial balance of trade deficit to a surplus, potentially $500 billion to a trillion annually.
Also, Chinese wages are rising even as manufacturing technologies such as 3-D printing and other software-driven approaches are helping bring factories back to the West. The Chinese model of cheap outsourcing is just about tapped out or will be in the next ten years.
A lot of it is news hype. Disaster sells stories, a "2% decrease in growth" doesn't. The US wasn't doing badly a few years ago, and China isn't doing all that badly now.
Something to remember when the hype and stories come up in the next few years. We'll all muddle through, just like we always do.
A lot of it is news hype. Disaster sells stories, a "2% decrease in growth" doesn't. The US wasn't doing badly a few years ago, and China isn't doing all that badly now.
Something to remember when the hype and stories come up in the next few years. We'll all muddle through, just like we always do.
I have a number of friends there who are entrepreneurs/small business owners in China. Over the past few years, they have regularly been "asked" by local government to pre-pay the current year's taxes. One friend has now pre-paid three years' worth of tax after successive approaches by tax authorities. (The conversation went like this: "We need you to pre-pay this year's taxes." "But I already did." "Then you can pre-pay for the coming year.")