It is unnecessary for U.S. government to pays off Chinese Debts.

Mar 23, 2016
by: lancegui

It is unnecessary for U.S. government to pays off Chinese Debts.
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
So yes, debt matters. But right now, other things matter more.

1. There is no ceiling on Debt/GDP ratios. Most of the countries we looked at had Debt/GDP ratios that exceeded 100% without sparking a financial crisis and in some cases, the ratio hit 200%. Whether the increase in Debt is perceived as temporary and will decline when the cause (war, recession) is over, or whether the cause is secular growth in unpaid for government services is more important than the level of debt.
2. The Interest Coverage Cost is more important in sparking a financial crisis than the Debt/GDP ratio. Japan’s low interest rates have been able to sustain rising debt. If the Interest Coverage rises above 5%, this can spark a financial crisis if it appears the level will remain above that level and will continue to rise.