Question: How concerned should we be about (1) our level of national debt and (2) China holding a large portion of our national debt?
Paul Solman: These are among the great debates of our time, of course.
Short-term, if we’re committed to reviving our (and the world’s) economy anytime soon, we seem to have no choice but to borrow more, thus increasing the level of our national debt. (See our ‘explainer’ on the subject.)
Long-term, it’ll all depend on U.S. economic growth. If it’s healthy, the government will take in enough revenues (via taxes) to service its higher debt burden. If we DON’T grow, the debt will be a heavier and heavier burden indeed.
As to China, the nightmare scenario has been that they’ll suddenly unload the U.S. IOUs they’ve accumulated (the Treasury bills, notes, and bonds we give them in exchange for their loans). This would flood the market with T-bills, notes and bonds. Their prices would drop, meaning the interest rate on them would soar. Bad for us. Very bad. But bad for China too, right? Hard to see them undermining their own chief investment.
To update an old saw: Borrow a million dollars from the bank and you OWE the bank; borrow a TRILLION, and you OWN the bank. Same for China and U.S. debt, if you see what I mean.
Here’s an exploration of this last issue, based on an interview we did in January with Harvard’s Ken Rogoff: