Carnegie Endowment for International Peace
There are conditions under which governments can create money—or debt—without fear of inflation or excessive debt burdens. There are other conditions under which debt or money creation can lead to inflation and balance sheet problems.
Facebook seems to think its new digital currency Libra will be used mainly for purchasing goods and services and for current account transactions. But it will probably be used mainly for capital account transactions. Do we really want to eliminate frictional costs on the capital account?
As long as China has debt capacity, it can achieve any GDP growth rate Beijing requires, simply by allowing credit to expand. But debt levels are already high, and credit must expand at an accelerating pace to maintain growth. China is probably still a few years away from reaching its debt limits, but the more debt grows, the lower the country’s growth rate average will be over the long term.
China’s success will depend Beijing’s ability to centralize power, to begin to sell off government assets, to rein in credit growth, and to accept much lower GDP growth rates.
China’s problem is excessive debt in the economy, not a banking system facing insolvency. Beijing’s reform strategy should reduce the debt burden as quickly as possible to minimize the economic costs.
A simple model can help illustrate the problems that China will face over the coming decade.
Because savings and investment must always balance, the idea that the savings rate in any country is determined at home is nonsense.
The value placed on current and future growth says a lot about the quality of that growth. It also has important policy implications, especially for reforms.
If the world does indeed face another decade or two of “superabundant capital” in spite of economic stagnation and slow growth, the historical precedents suggest a number of consequences.
China’s disproportionate demand for iron is the result of its investment-driven growth model. In considering how Chinese adjustment will affect Australia, one must consider global savings imbalances.
Policies that affect the savings rate of a small country can have more-or-less predictable domestic impacts because the global economy is so large that domestic policies are not affected by external constraints. But with a large economy, the analysis changes.
While debt plays a key role in understanding the recent evolution of the Chinese economy and the timing and process of any further adjustment, there seems to be a remarkable amount of confusion as to why debt matters.
Rising inequality is inextricably tied to economic imbalances and, in a context of limited productive investment opportunities, the only sustainable outcome is sharply higher unemployment.
The Chinese growth model is not radically new. It is based primarily on the growth model developed by Japan in the twentieth century, and it has been implemented in various forms by many countries.
China’s low level of social capital constrains its ability to absorb additional capital stock productively, causing the country to over-invest.