There is increasingly a consensus in Beijing that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable. Aside from the economy’s current path, there are only four other paths China can follow, each with its own requirements and constraints.
Giving up use of the U.S. dollar for global trade and reserve accumulation would be very difficult for U.S. adversaries and would require major economic adjustments, though it would be in the best long-term interests of the United States for the global use of the dollar to be more constrained.
Most economists have trouble understanding why too much debt may harm an economy, let alone how much debt counts as too much. To make matters worse, the common practice of comparing vastly different countries’ debt-to-GDP levels is not a useful tool for gauging how a particular economy is likely to manage its debt burden.
Chinese leaders know that they want to discontinue the country’s existing growth model, but they haven’t yet landed on what the sustainable alternatives are. Beijing’s new common prosperity policy will only help shift domestic demand at the margins, but a full-fledged rebalancing will require a more radical transformation.
The impact of Evergrande has caused financial distress to spread faster and more forcefully than Beijing’s financial regulators expected, putting pressure on them to move quickly to stop the contagion. But they cannot rescue Evergrande’s creditors without also undermining their fight against bad debt.
The bezzle, a word coined in the 1950s by a Canadian-American economist, is the temporary gap between the perceived value of a portfolio of assets and its long-term economic value. Economies at times systematically create bezzle, unleashing substantial economic consequences that economists have rarely understood or discussed.
A recent study on U.S.-China trade concludes that Trump’s trade policies cost the U.S. economy nearly a quarter million jobs. But its obsolete understanding of trade flows ends up pointing trade policymakers in the wrong direction.
The idea that trade imbalances are more likely to be the result of credit imbalances than of savings imbalances ignores the role of savings imbalances in creating credit imbalances. When a surplus country demands to be paid for its trade surplus with claims on American assets, the U.S. economy must adjust to create these assets—and one of the most common ways it does so is by expanding credit.
It is easy to assume that sovereign debt forgiveness involves a collective transfer of wealth from the creditor country to the debt-owing country, but this is only true under specific—and unrealistic—conditions. In today’s environment, sovereign debt forgiveness mainly represents a transfer within the creditor country. It benefits farmers and manufacturers in the creditor country at the expense of the country’s nonproductive savers.
There is a widespread belief that a country’s national debt burden is sustainable if the interest rate on its debt is less than its expected GDP growth rate. But, in fact, the relationship between interest rates and the GDP growth rate reveals more about the distribution of income in a country than about the sustainability of its debt.
It is a mistake to assume that there is a global capital and technology frontier toward which every country must strive to acquire development. Economic development requires, above all, the right set of formal and informal institutions.