The U.S. national debt is the cumulative total of the federal government’s annual budget deficits. It’s a direct result of the government consistently spending more than it collects in taxes. This debt, in the form of Treasury securities, finances a wide range of government functions and programs, including social security, Medicare, defense, and infrastructure. During economic crises or wars, government spending skyrockets, leading to sharp increases in the debt. A key feature of U.S. debt is its status as a “safe haven” asset, which means there’s always strong global demand for it, allowing the government to borrow at relatively low interest rates.
How the Fed Plays a Role
The Federal Reserve, the U.S. central bank, is a crucial player in the debt market through its open market operations. When the Fed wants to stimulate the economy, it buys Treasury securities from banks. This injects new money into the financial system, lowers interest rates, and encourages borrowing and spending. Conversely, to cool down an overheating economy, the Fed sells securities, which pulls money out of the system, raises interest rates, and slows down economic activity. The Fed’s actions are voluntary for the banks and are designed to influence the market, not force banks to act. This ability to manage the market for government debt gives the U.S. government immense flexibility to borrow and spend.
China’s Debt: Fueling Growth and Risk
In contrast, China’s debt is a more complex issue rooted in its unique state-directed economic model. While China has central government debt, a significant portion of its total debt comes from Local Government Financing Vehicles (LGFVs) and State-Owned Enterprises (SOEs). Local governments created LGFVs to borrow money off their official balance sheets, primarily to fund massive infrastructure projects and real estate development. SOEs also took on immense debt from state-owned banks, often to pursue government-mandated development goals rather than for profit. This debt-fueled investment strategy created phenomenal growth but also led to misallocated capital, such as underutilized infrastructure and “ghost cities,” which don’t generate enough revenue to pay back the loans.
How the PBOC Manages Risk
The People’s Bank of China (PBOC), China’s central bank, faces a different challenge than the Fed. The PBOC’s primary focus has shifted from simply managing economic growth to containing the immense risk posed by this hidden debt. It can’t use traditional open market operations in the same way because much of the debt is tied to local governments and state-owned companies, not a deep and liquid secondary market for their debt. The PBOC often intervenes by providing targeted liquidity to prevent defaults and maintain financial stability, but it’s a difficult balancing act. The PBOC must support economic activity while attempting to de-risk a system where a significant amount of borrowing was not based on sound market principles.
Naixian Zhang 