What do Chinese capitalists and Wall Street’s finance chief have in common? Everyone fears the excessive deficit and American public debt. It’s a problem that’s getting worse the “exchange vote” practiced on a macroscopic scale by Joe Bidenfor example through the cancellation of university debts.
Last Friday I was in Shanghai where I had three meetings with selected groups of Chinese entrepreneurs and investors, a sampling of local capitalism. From me, they especially wanted analyzes and forecasts on the November 5 presidential elections. I was struck by how often I was questioned about the state of public finances in Washington. Why are rich Chinese so worried about “our” public budget?
The latest data, just released upon my return to New York, justifies the concern. In the last semester the federal budget deficit rose to $1,064 billiondriven by a 10% increase in public spending on healthcare (yes, contrary to Italian stereotypes, we have public healthcare here too), 9% in spending on pensions, and 43% in spending on interest on Treasury securities. US public debt exceeded 120% of GDP last year. The deficit exceeded 6% of GDP.
All these numbers and percentages must be put into the right perspective so as not to makenonsense alarmism. First of all, there are quite a few countries – from Japan to Italy – that are even more indebted than the United States in proportion to their GDP. The American economy also has many reasons to be considered more solid and more solvent. It has a positive demographic. It is growing more than most other industrialized countries, and strong economic development is the healthiest way to make the debt sustainable. Finally it has the unmatched advantage of a universal currency, the dollar, accepted by the rest of the world as the safest and most liquid currency. Finally, it must be debunked the false myth whereby America would be at the thanks to its foreign creditorsChinese in the lead.
No, even in the United States the public debt is financed first of all by domestic creditors: central bank, public welfare, pension funds, are the main holders of Treasury securities. Among foreign creditors China isn’t even the first, Japan precedes it. And the Chinese share of US debt has never exceeded 5% of the total. However, America’s strength does not mean it can continue to accumulate debt indefinitely. One of the limits is highlighted by the most important banker in the United States: increasing debt causes interest rates to riseand these penalize everyone.
The Chinese I met in Shanghai were right to be worried. Indeed, they have more than one reason. Certainly part of their assets are invested in dollars, many of them also have a second home in the United States, perhaps a Green Card, and some daughter or son studying at an American university. So there is a “personal” concern. But I believe a systemic concern is even more important for them. America is the main market for Chinese exports. The health of the US economy also influences the rest of the world, starting with Europe. If the United States were to suffer tensions linked to an excessive deficit and public debt, the negative repercussions on China they would be automatic.
Then there is the question of interest rates. It is no coincidence that the fears I felt last Friday in Shanghai are now reflected in the American press in another form: all the US media pick up Jamie Dimon’s warning, chief executive of the first American bank, the JP Morgan Chase of New York. In his letter of analysis, 61 pages long, the banker warns about the impact of the deficit and public debt. Dimon is in contrast to the market optimism and the Federal Reserve itself, which at least until recently saw a future of reducing the cost of money.
For the number one of JP Morgan Chase American interest rates could rise to 8%, precisely as a consequence of the accounts being in the red. «The enormous public spending, the trillions required for the green economy, for the rearmament of the world, for the restructuring of global trade: all this has an inflationary effect», we read among the banker’s considerations. Interest rates at 8%? They would be a powerful brake on growth and employment. And similar American returns would have repercussions on all other world economies, including Europe and China.
It doesn’t help that we are in the midst of an election campaign. America does not escape the “government spending election cycle” rule: those in government try to gain consensus among voters managing public spending. Biden does it with unscrupulousness.
I point out two examples. The latest data on employment growth in the United States was very positive – more than three hundred thousand new jobs in just one month – but in second place among the hiring sectors is public administration. Then comes the most striking and controversial case of large-scale “vote swapping”: the cancellation of university debts. It’s a clientelistic, electoralist, profoundly unfair and unconstitutional maneuver. But it goes on anyway. That it is against the Constitution is not said by me but by the Supreme Court: last year it rejected a cancellation of student debt amounting to 430 billion, because with that measure the federal government abused its power (budget laws must be approved by Congress ). The inequity is evident to the naked eye. 60% of Americans don’t have a college degreethose who attend university are more often the children of parents who have already graduated: canceling debts contracted with banks for university studies is a reverse redistribution, uses public resources (also financed with taxes on workers’ wages) to give money to the upper middle classes. It rewards insolvent students, mocking those who have always honored their installment payments to the banks. Furthermore this makes universities even more irresponsible, free to increase fees dramatically because students have their costs covered by the State. (The latest record, from a few days ago, is from a private university which has reached the ceiling of one hundred thousand dollars per year for tuition plus related expenses).
Ignoring all these objections, and trampling on the Supreme Court ruling, Biden has just signed a new executive act with which it cancels debts of 30 million students or former students. Mega-vote exchange, because in this way the Democratic candidate uses public resources to curry favor with young people. The “election cycle” means that at the end of this year the fears of my Chinese interlocutors, and of the banker Dimon, will probably be even more well-founded than today.
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