(This article is an excerpt of a longer article: The Looming Economic Crises in China and the United States: A Tale of Two Corrupt Systems.)
What has been sustaining a façade of prosperity in the US is the US national debt, which now exceeds $37 trillion and is increasing at a pace of $2 trillion a year.
The US national debt is already in a vicious cycle that has no return: richer elites, poorer youth (and even poorer future generations), and a debt-addicted nation.
Few people truly understand how desperate the situation is. Many say that the US debt-GDP ratio is only about 150%, significantly lower than that of Japan and China. But there’s a fundamental misunderstanding about this matter.
The national debt is also devastating Japan and China, and there’s no cover-up for that fact. However, the problem is not the debt numbers themselves, but the annual interest that a nation must pay for its debt, and how hard it is for the nation to restructure the debt to avoid a default. All this has to do with how the debt is sold and purchased, and who the creditors are.
Japan’s debt, as devastating as it is, is largely owned by the Bank of Japan (45%) and other financial institutions and corporations. This is done not through a free market, but a persuaded “patriotic” participation. These institutions expect a disaster. Not that a disaster is good, but much of the pain of the disaster was already built-in, requiring much less political and social restructure when disaster strikes.
China’s debt, also devastating, is even more internally controlled than the Japanese counterpart. Here, “internally” doesn’t mean merely domestically, but politically. It’s mostly within the Chinese government. It doesn’t mean that any necessary reconstruction will be painless, but it does not require the destruction of a productive free-market system, which China mostly lacks in the first place, and this lacking in the first place paradoxically would work as a pain relief when a disaster strikes.
To put it simply, in China and Japan, when a crisis arises to a point that the governments have to force the creditors to write down what they own or accept an artificially lower interest rate, they would be able to do it.
Not in the US. The US debt is of an entirely different nature. The whole thing is based on free market principles, meaning that the creditors buy the US national debt for their own financial gains. This is not an evil to start with, because this is exactly where the strength of the US economy lies: the free market.
But as always is the case in this world, the better a thing is, the worse the effect of abusing the thing will be.
The free market is the bedrock of the US economy and society, but when the nation abuses it by taking on an excessive amount of debt, it will find that it is left with no non-market administrative means to solve the problem.
Rather, the US will face the devastating cost of its own abuse of the free market: destruction of the free market.
The bottom line is that the US cannot solve its debt problem without damaging or even destroying its economic foundation: the free market.
The US is already paying $1.2 trillion in interest annually, and this is expected to rise dramatically due to the much higher interest rate now (and very likely in the future as well) than the previous years.
For people who don’t realize what a $1.2 trillion payment in interest means, it is almost 1/3 of the entire US internal revenue. Just imagine one-third of your income goes to pay for just the interest on your debt. Not an amortized monthly payment, but for interest only. Then try to also imagine that this interest payment is going to increase, and could easily double in the near future.
If you don’t see an imminent collapse of the system, you will need to check your brain and your pulse.
This article is an excerpt of a longer article: The Looming Economic Crises in China and the United States: A Tale of Two Corrupt Systems.
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