I read a couple of articles the other day about how China’s amazing economic growth may hit a wall because of overhanging debt.
Countries get in trouble when the overall debt—governmental, individual, business and financial—increases at a faster rate that the output of goods and services (GDP).
What this means in the short run is a transfer of wealth from taxpayers and workers to holders of financial assets. What this means if it goes on long enough is a financial crisis.
As economic Michael Hudson wrote: Debt that can’t be paid, won’t be.
The point of about debt is that no matter how rich you are, you can pile up more debt that you can pay. And no matter how large and strong a nation’s economy, the economy can pile up more debt than can be paid.
The United States in the 1920s is an example. The USA had the world’s strongest manufacturing economy. It had a large domestic market and strong exports. Yet it took more than 10 years to fully recover from the financial crash of 1929.
China has many more governmental powers to head off a crash than the U.S. government did back then. The question is how they will be used. Propping up failed companies and financial institutions does not solve the underlying problem.
The world as a whole is in the same situation, so it is not as if global economic growth will solve China’s debt problem—or America’s.
China’s $28 Trillion Problem: the dark side of China’s debt by Mike Bird and Jim Edwards for Business Insider.
How China Accumulated $28 Trillion in Debt in Such a Short Time by Jim Edwards for Business Insider.
The $26 trillion dollar debt problem that is crushing competitiveness in China by Nick Edwards for the South China Morning Post.
Is the Chinese Economy Really in Trouble? by Eamonn Fingleton for The Unz Review. The case for not selling China short.
Heed the fears of the financial markets by Lawrence Summers for the Financial Times.
Debt is not just a Chinese problem. The figures in these charts are not current, but I don’t think the situation has significantly changed. If there’s something I’ve overlooked, I’d be interested in comment as to what it is.