Mortgaging global leadership | American Enterprise Institute
On Monday, the Bank of
International Settlements released global 2020 figures on outstanding credit, a
comprehensive measure of debt burden. How much America’s debt matters is a
debate that won’t be settled by a blog post. But if debt matters at all, the US
just entered risky territory for global leadership.
In the middle of 2001, outstanding credit began climbing as a proportion of GDP, from 186 percent to 251 percent by mid-2010. The financial crisis caused a jump in the fourth quarter of 2008, but deterioration was otherwise steady. The US borrowed more yet did not see more output — funds used were not productive.
Not coincidentally, the 2000’s
were economically sluggish. Annual GDP gained a mere 18 percent from 2001 to
2010. National wealth rose 37 percent. But the sluggishness ended. By the
middle of 2019, the credit/GDP ratio was 249 percent. Annual GDP over this
period gained 40 percent. Wealth rose 70 percent.
GDP obviously overlaps with
credit/GDP (wealth is more telling). There’s also a causality question: Does
debt slow growth or does slow growth induce debt accumulation?
Additional unfortunate evidence
comes from Japan. Japan’s first available figure is outstanding credit at 296
percent of GDP for 1997. For 2019, this is 378 percent. Japanese annual GDP in
2019 is only 15 percent higher than in 1997, versus a 150 percent rise for the
US. The full explanation of Japanese stagnation is long and complex, featuring
demography, but credit/GDP at 296 percent looks like a warning sign.
At the end of 2020, American credit/GDP was 296 percent. It soared 43 points in a year, while the previous 43-point increment took 15 years. In 2020, more than two-thirds was due to government, dwarfing household and corporate credit. The Biden administration projects 2021 as worse and, even with ensuing normalization, 2026 government borrowing will be heftier than 2013-2019.
There are reasons to borrow,
such as easing suffering during a downturn. As the reserve currency country, the
US has fiscal leeway. But there is no evidence sustained borrowing boosts
long-term growth and plenty of evidence it hurts, including the past two
decades. American wealth and GDP gains in the 2020’s will likely be slower than
This obviously has domestic
implications. It also has international implications, extending to competition
with the People’s Republic of China (PRC).
With debt, the US is in a duel
with China we don’t want to win. In the first quarter of 2008, the PRC’s
credit/GDP level was only 143 percent. By 2019, it was 263 percent. China had
gone from a leverage position far superior to America’s to one slightly worse.
China’s 2020 credit/GDP ratio
climbed 27 points, awful in any other year yet not as stark as the American
run-up. The US regained the “lead.” The PRC’s borrowing appears to be led by
corporates, but the divide between state-owned enterprises and government is
thin. It can reasonably be viewed (also) as public borrowing.
It’s difficult to assess economic effects. Official Chinese GDP growth has slipped, suggesting rising debt hurt. But the growth decline is too smooth to believe. The official press just highlighted a report of private wealth gains. It doesn’t fit an older study from the government-run China Academy of Social Science.
Beijing wants to claim declining wealth inequality and state assets remaining larger than fast-rising liabilities. Another problem is the state owns most land and estimates of unsold land value vary greatly. These factors undermine wealth reporting, as well as impairing an independent effort by Credit Suisse.
That shows rapid Chinese wealth
growth slowing in 2014 and temporarily reversing in 2018, implying a blow from
debt. But Credit Suisse makes enormous revisions for China. Total wealth was originally
put at $29 trillion in mid-2017, while most recently it was $64 trillion at the
end of 2017. These data are not usable, either.
An alternative is to treat personal income as the main engine for national wealth. The first year China reported per capita disposable income (PCDI) comparable to America was 2013. From 2013 to 2020, China’s annual PCDI rose 75 percent, roughly $2000 (using 2020 exchange rates).
During this time, American PCDI added 30 percent, which is $12,000. The income ratio between the US and PRC narrowed, the absolute gap widened. Gross national wealth results should be similar. And net wealth should tilt to the US due to a slower rise in credit/GDP during 2013-20.
When America’s debt burden was
large and China’s small, the PRC easily outpaced the US economically. Less
recognized is the 2010’s, when slower American credit accumulation and improved
economic growth excelled rapid Chinese credit expansion and slowing growth. In
particular, the personal income gap rose from $37,000 to $47,000.
The 2020’s may be different again, unhappily. Federal borrowing in 2020-21, at least, will depress American growth. If China curbs its credit addiction, America’s economic leadership is at risk.