China sentences to ponder

With credit at 200% of GDP and average financing costs of roughly 7%, Chinese borrowers now need to generate cash-flow growth of 14% to cover their interest payments without eroding their profitability or being forced to borrow yet more.

From Free Exchange blog, there is more here.


Does this mean that China faces a debt crisis? Far from it. The aggregate credit-to-GDP ratio covers government, corporate and household debt. Although 200% is at the high end for developing nations, it is below aggregate debt levels in more mature economies. Data from 2011 published by the McKinsey Global Institute (excluding borrowing by financial institutions) shows that the euro-area crisis countries had far higher debt-to-GDP ratios, from 260% for Greece to more than 400% for Ireland.

LOL. Well that's comforting!

How much cash flow growth do US borrowers have to generate to stay above water?

245% debt to gdp private and public net.

Average interest rate on debt? We'll make it up, 5% maybe.

So 12.25% cash-flow growth required to service the debt? So we would have to increase nominal gdp by at least that amount to reduce overall debt ratio without defaults right?

Sounds scary but does it actually mean anything? When does it start to matter? Why doesn't it matter yet?

Of course it matters, but the effects are hard to see just yet. Important perspective, I think is to understand the net worth numbers. So, in America, we might have total debt of, I don't know, $30 trillion, but total assets of more than $100 trillion. This is not a debilitating amount of leverage, but it is uncomfortable. I'm sure the numbers for Greece are a lot more dire.

What bugs me is the chutzpah of politicians. $17.5 trillion in federal debt is $17.5 trillion of assets yet to be confiscated, for services rendered. We are not as rich as we think we are.

Public US unfunded liabilities themselves are anywhere from $122 Trillion to $300 Trillion, depending on whose estimates you consider. US total private assets are around $112 Trillion. The US is already collectively leveraged beyond its collective assets. The ONLY reason it is not debilitating at the moment is due to worldwide demand for our currency. If that ever falters, our financial situation implodes. And there are already signs of major trading partners settling trade debts outside the USD. Most of them have an intense desire to cast the USD aside. God help us if they ever get organized.

The entire last half century of US economic growth is due entirely to the growth of public and private debt, fueling a rise in consumption without a commensurate rise in production. Only a very tiny portion has anything to do with real economic growth due to a rise in production.

So China produces real material things for us and we give them empty promises in return? Where's the problem?

Nope. Your liabilities (Kolitkoff?) include the value of future benefits to be earned. Either take these out or count associated future tax revenues as assets.

You are correct that the debt numbers I mentioned above do not include these 'unfunded liabilities', so I do understate the problem somewhat, but nothing like your numbers.

By the way, people think Europe is better off right now in terms of debt, but their 'unfunded liabilities' (health care and pensions) dwarf those of the US.

Good questions, and I don't know. I say you can't print money and buy your own debt with it, but I'm demonstrably wrong.

bean chop suey in future

Huh? That quote doesn't make sense. How do you get "cash flow growth" from debt levels as a pct of GDP and average financing? I guess you could say that if debt levels increased by 200% of GDP each year, then borrows would need to come up with that extra amount to finance the debt each year. Otherwise, this quote is nonsense.

Yeah, I was wondering this myself. The interest expense is simply 14% of GDP. So whoever collectively owes that money needs cash flow on the order of 14% of GDP to avoid growing debt. It could easily be the case that collectively they already have the cash flow to cover that. So basically the entire premise of the article is based on bullshit as far as I can tell.


Bingo. Besides, unless I'm mistaken there's some chunk that's household debt. The article was much broader than this one snippet, but ooops, who let that stinker through. I guess the Economist's fact checkers don't bother with the blog section.

PS Come to think of it, another chunk is financial sector debt, I believe. A lot of those unit trusts are smaller banks raising funds. In general it's not as if the economy is going to be bled of that ~14% of GDP. That's the gross interest payments being passed around within the economy.

I was wondering that myself. There's simply no value to what's presented in the article without more detail or analysis.

Completly agree, the quote is a terrible written sentence.

The secret to this riddle is found here:

Note if you include US corporate and private debt as well as public debt in the numerator, and then divide by GDP in the denominator, you get total debt-to-GDP figure of 360% for the USA, which is far above China's 200%. For an average US family it works out to over $750000, which will take several generations to pay off (unless the easy way is taken and the US just defaults, or hyperinflates away the debt).

How do you pay off money that you owe to yourself?

Yes. (sic)

You don't. You just print up whatever you need and pay everybody with it.

Define yourself. If I or any of those owing debt can't come up with the cash to make the payment i'm in default. If my collateral losses value the bank will call my line of credit.

Debt is fine but at one point it makes your business, household or country very fragile. How much of the fed policy is forced by the necessity to keep financing charges moderate, or the treasury auctions from failing?

That's not the way it works, pal.

Viewing this debt of the Chinese economy, it looks similar to the US 1980s economy and I still expect a S&L slowdown (not crisis) here in 2018ish.

The debt and economy is not big enough for a full blown crisis but it appears there is malinvestment.

Bernanke expected merely a cool slowdown in the housing market around 2008ish... little did he know...

The debt and economy are never too big for a full blown crises. Indeed, the bigger the debt, the bigger the crises. Malinvestment is rampant in the US economy.

Comments for this post are closed