Saturday, March 07, 2015

The New Calculation of MAD

Guess who's credit rating is in trouble.

For quite some time, people have argued that we can't confront China because of our debt that China holds. That is, China could wreck our economy because we owe them so much money.

I had my doubts about whether that was true. If push came to shove, why wouldn't we just repudiate our debt to China citing a war situation? And short of war, could China afford to sell off that debt to harm our credit? Would there even be buyers?

And if the threat was that China would stop buying our future debt (as an investment, remember), where would they put their money that would be safer? And if they didn't buy our debt, how would we continue to buy their products that keep their economy humming and their people reasonably quiet under Communist Party rule?

Regardless of how that situation would have played out in the past, China has passed us--by far, a quick Google search says we are on the order of 80%--in debt-to-GDP ratio:

According to a new report by the McKinsey Global Institute (MGI), China’s debt has quadrupled from $7 trillion in 2007 to $28 trillion as of mid-2014, reaching 282 percent of gross domestic product (GDP) and higher than the level of the United States. Continuing its current pace of growth would see China’s debt reach 400 percent of GDP by 2018, the equivalent of Spain.

Commenting on China’s debt explosion, the report said: “Several factors are worrisome: half of loans are linked directly or indirectly to China’s real estate market, unregulated shadow banking accounts for nearly half of new lending, and the debt of many local governments is likely unsustainable.”

Although it isn't entirely clear if we are comparing all debt--national, local, and private--to make the comparison. Perhaps just saying China's debt is "higher" includes more than just our federal debt level that I cited above.

Regardless, even if China's debt hasn't grown much worse, we at least have a situation of Mutually Assured Debt. China doesn't have the strangle-hold on us that so many people have assumed.

Maybe China can't really afford to buy Greece, after all.

Heck, maybe Russia should worry about China's debt. What if China's debt compels them to confront Russia for resources in the Russian Far East that China has now-dormant claims on?