People, Countries, and Debt

James Kynge writes about China,

Total debts owed by the government, companies and households have ballooned to 240 per cent of gross domestic product, virtually double the level at the time of the global financial crisis.

This ratio, it is true, remains modest next to some in the west; US debts stand at 322 per cent of GDP, Ireland’s at more than 400 per cent, while Greece and Spain are at about 300 per cent each.

Pointer from Tyler Cowen.

To me, it seems careless to add up the liabilities of government, companies, and households. I object to taking the sum of these numbers and saying “China owes ___.” The debt is not owed by an entity called the country of China. It is owed by disparate entities within the country of China. And much of it is owed to disparate entities within China.

Speaking of which, it also seems careless to ignore assets. Suppose somebody has a $300,000 mortgage and a $30,000 income. You might say, “wow, their debt is 1000 percent of their income!” But that is not so alarming if they have $1 million in assets (maybe the house itself is worth $1 million).

I’m not trying to dismiss the issue. Just the other night, one of my favorite economists pointed out that if the debt burden on the Chinese government starts to pinch, then it might have to stop buying (or even start selling) American government bonds. That could fuel a rise in interest rates, and then the debt burden of the American government would spike up. If that happens, have a nice day. But a high ratio of total liabilities of all of the entities within in a country to its GDP is at best a very imprecise indicator of financial distress.

4 thoughts on “People, Countries, and Debt

  1. Yes, there is a very big difference between me owing John $1 million dollars- and me owing John $500,000 while he owes me $500,000.

  2. The trendline here concerns.

    Keynes seems so quaint now: borrow in the bad times, tax in the good times. Now it is borrow all the time.

    Inflation and writing down asset values looks like one of the better endgames here.

  3. It is more the change in level than the level, but more for private than public debt, as it represents an increase in disparity of expectations between creditors and debtors.

  4. You can see the amounts owed to major foreign holders here.

    Unfortunately, the data only goes back a year on that page, though it’s been reported like that for years, so I figure it can be looked up somewhere.

    What you’ll see in that China actually has stopped increasing their position for over a year now, with some noisy but small fluctuations. I think it’s been hovering around $1.3 Trillion for several years now. If they have a trade surplus, it seems they are spending their dollars somehow.

    Other major holders are also pretty stable, with the exception of Belgium, which has doubled its position over the past year for some strange reason.

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