Published January 9, 2019 on Linkedin
Is China a ticking debt time bomb or is there something we don’t know about China?
A September 17, 2018 Bloomberg article by Enda Curran suggested that China may be a ticking debt bomb. Curran wrote: “To doomsayers, China’s $34 trillion pile of public and private debt is an explosive threat to the global economy. Or maybe it’s just a manageable byproduct of the boom that created the world’s second-biggest economy.”
China’s $34 trillion in debt (which is now 266% of China’s GDP) is eclipsed by the $70 trillion of total debt outstanding (based on Federal Reserve statistics for 2ndQ 2018) in the US (which is 363% of the US GDP). Canada has the same total debt to GDP ratio as the US.
While on the surface China’s debt situation seems problematic, one must study China’s monetary history more closely to understand why it differs from the US and in fact all Western nations.
Most Westerners have no idea about what actually makes China tick nor about its monetary policies and history. Few have studied the importance of China’s adoption of the financial policies and wisdom of American President, Abraham Lincoln, following the end of the Qing dynasty (1644 to 1912); Qing means ‘happiness’ in Chinese. China is the longest surviving civilization in the world and presumably is smart enough to last another 100 or more years during an economic era defined as Xiaokang — a 3,000-year old Confucian term that literally means ‘well-being’ or a “basically well-off” society.
Since 1979, Xiaokang has been China’s economic philosophy for its economic modernization. I had the pleasure of advising China between 2003-2006 in the development of Xiaokang indicators of progress for its major cities.
The original goal for a Xiaokang economy in 1979 was to achieve a GDP per capita of $US4,000. Today China’s per capita GDP is over $8,000 a far cry from US GDP per capita of $62,500 and median household income of $62,175. China has a long way to go to achieve the same level of GDP per capita as the US, Canada and European nations but does it need to achieve the goals of a genuine well-being economy?
Moreover, is China’s debt problem a serious existential threat to China or the world or is there something missing from this picture? I believe China will actually survive the forthcoming global financial Armageddon when the national debt cancers all begin to explode. Why?
American author and public banking expert, Ellen Brown (The Web of Debt and the Public Bank Solution), revealed to me that China’s unique advantage is that long ago (at the end of the Qing dynasty in 1912) adopted the monetary policies of the President Abraham Lincoln.
Lincoln argued that “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”(1861)
Lincoln issued the ‘Greenbacks’ – a national currency issued by the government to help pay for the Civil War effort. This resulted in millions in cost savings avoiding the 24-36% interest charges the New York banks would have charged on their loans. Lincoln also began to take back control over money creation from the dominance of private banks.
What most economists in the West do not comprehend is how China’s adoption of Lincoln’s model for monetary sovereignty may leave China standing alone when the global debt game of musical chairs ends. China appears to have the competitive advantage in terms of economic and financial strategies. It was Sun Yat-sen (the founding father of the Republic of China who ended the Qing dynasty) who first adopted Lincoln’s monetary policy ideas; these policies were maintained and even strengthened by Mao Zedong and the communists.
What does this mean?
China, like Japan but to a lesser extent, has a sovereign monetary system meaning that the central (public) bank has the power to create money (credit) without any cost (interest) to the citizens. On the other hand virtually every other country, including US, Britain, Canada, European and most other nations, rely completely on private-bank created debt money. Today in Britain, the US and Canada, private banks create nearly 98% of all new money in the form of debt. The consequences of ceding power over money creation to private corporations is significant.
Today the total outstanding debt in the US stands at over $70 trillion; total debt has doubled roughly every 7 years since the 1940s. Since 98% of all money is debt money this means that every $1.00 of GDP and every $1.00 of household expenditures will have hidden imbedded interest costs. There is no official accounting for the actual interest costs that are found in every dollar of goods, services and taxes paid by Americans or Canadians.
I’ve calculated, using US Federal Reserve statistic, that the average American worker will pay about $0.50 on every dollar spend on hidden interest costs that are imbedded in more than $70 trillion of total outstanding US debt (household, business, government, foreign). That’s like having to work 20 hours in a 40 hour work week for payment of debt charges (interest) that would not be necessary if money creation was made a public good through public banks.
What if each of us had the power to create our own credit based on each hour of time we have to contribute to the well-being and happiness of others, our families ave ourselves?
Imagine a world where you only had to work half of the hours a week if there was no longer the burden of debt payments?
What if America had adopted Lincoln’s vision for monetary sovereignty like China appears to have done successfully?
What if money creation became a public good?
Government’s can create money at virtually no cost (other than operating costs) without debt charging interest. Money can be created in sufficient quantity to make an economy function well and efficiently. In fact, there may be no need for paying taxes in a fully sovereign money system.
My analysis suggests that we would have to work fewer hours (by no longer working for unnecessary debt interest charges) freeing up considerable discretionary time (life energy) to do the things we are truly passionate about that contribute to our individual and collective well-being.
The fact that China adopted Abraham Lincoln’s monetary policies means that China’s Central Bank can engineer precisely the amount of credit that is necessary to fuel any kind of economic output it plans. China’s Central Bank simply ‘spends’ the money into existence in sufficient amounts necessary to fuel the nation’s economic goals, including a goal like a Xiaokang economy.
Can China escape an international debt bomb? Perhaps, if they fully understand the power of having adopted Lincoln’s model for monetary sovereignty.
Chinese citizens could achieve higher levels of economic well-being (a lower GDP per capita and lower household income) with fewer hours of labor than US citizens.
China can engineer the precise level of money needed to move to a more sustainable economy and their new goal of an ‘ecological civilization’, established in 2007. Broadly construed, ecological civilization involves a synthesis of economic, educational, political, agricultural, and other societal reforms towards sustainability.
If China can successfully move towards a truly sustainable economy of well-being (Xiaokang) using its unique monetary policies it would represent a major shift and focus on domestic consumption and household well-being, and less reliance on exports. China could become the first ecological civilization and functioning economy of well-being in the world. Whether China can navigate this path successfully remains to be seen.
Ellen Brown’s (author of the Web of Debt) provides an excellent perspective on the future of money systems led by China.
With innovations in sovereign money systems, led by Chinese entrepreneurs like Jack Ma of Alibaba (the equivalent of Amazon in China), we could see the end of conventional banking and the need for financial intermediaries who currently create 98% of our money as debt and charge us fees.
Perhaps the future of money will be on in which we ultimately create our own credit (money) based on reclaimed sovereignty of our most precious and limited asset: time?
Imagine a future where you have genuine sovereignty over the estimated 750,000 hours of life you have to live? That is a future that is within our capacity to manifest.