By William S. Lind

Traditional Right

A spectre is haunting the world, the spectre of a world-wide debt crisis.  Could the coronavirus epidemic in China be the trigger?

World debt levels, both public and private, have reached undreamed heights.  The United States is now running deficits of a trillion dollars a year. Other countries have higher deficits proportional to the size of their economies.  Private individuals here and elsewhere find they can only maintain a middle class standard of living by taking on ever more debt. Where does it end? In a debt crisis.

A debt crisis occurs when lenders get sufficiently scared of losing their principal that they refuse to lend, or at least to lend at affordable rates of interest.  Like all market dynamics, this is not a rational calculation. Markets are forever balanced on a knife edge between greed and fear. Under normal circumstances, greed wins and people continue to invest.  But when fear takes over, the plunge can come with remarkable speed. Fed Chairman Ben Bernanke was not exaggerating in 2008 when he said the United States was within 48 hours of not having an economy. If lending stops cold, so does everything else.

The question is not whether a world debt crisis is coming.  The question is where and when it starts. My bet has long been on China.  China has towering levels of debt, public and private. To keep its economy growing, China has built whole cities that have no inhabitants.  Municipal governments have made enormous loans to overbuild because they wanted the construction jobs. The overbuilding has gone on at the same time individual Chinese have overpaid for their residences.  The intersection of those two facts will mean a debt crisis in China. Given China’s large role in the world economy, a debt crisis in China will soon spread.

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