How does the debt:GDP ratio affect the country's economy?
"Is it not that bad? Depends how bad is bad. The problems causes by a government having large debt are similar to those caused by an individual having large debt. The big issue is: More and more of your income goes to paying interest on the debt, and is thus not available for spending on goods and services. If it gets bad enough, you find you cannot make payments, you start defaulting on loans, and then you have to make serious sacrifices, like selling your property to pay the debt. Nations have an advantage over individuals in that they can sometimes repudiate debt, i.e. simply declare that they are not going to pay. Lenders can then refuse to give them more money, but that doesn't get their original loans paid back. In theory other nations could send in troops to seize property to pay the loan, but this is a very extreme solution. Totally aside from any moral considerations, modern warfare is very expensive, it's likely the war would cost you more than you'd recover on the debt. How much debt is too much? It's hard to give a number, any more than one could give a ""maximum acceptable debt"" for an individual. American banks have a rule of thumb that they won't normally loan you money if your total debt payments would be more than 1/3 of your income. I've never come close to that, that seems awfully high to me. But, say, a young person just starting out so he's not making a lot of money, and he lives someplace with high housing prices, might find this painful but acceptable. Etc."
"Quantitative Easing Explained: http://www.npr.org/blogs/money/2010/10/07/130408926/quantitative-easing-explained The short of it is that you're right; the Fed (or another country's Central Bank) is basically creating a large amount of new money, which it then injects into the economy by buying government and institutional debt. This is, in fact, one of the main jobs of the central bank for a currency; to manage the money supply, which in most fiat systems involves slowly increasing the amount of money to keep the economy growing (if there isn't enough money moving around in the economy it's reflected in a slowdown in GDP growth), while controlling inflation (the devaluation of a unit of currency with respect to most or all things that unit will buy including other currencies). Inflation's primary cause is defined quite simply as ""too many dollars chasing too few goods"". When demand is low for cash (because you have a lot of it) while demand for goods is high, the suppliers of those goods will increase their price for the goods (because people are willing to pay that higher price) and will also produce more. With quantitative easing, the central bank is increasing the money supply by several percentage points of GDP, much higher than is normally needed. This normally would cause the two things you mentioned: Inflation - inflation's primary cause is ""too many dollars chasing too few goods""; when money is easy to get and various types of goods and services are not, people ""bid up"" the price on these things to get them (this usually happens when sellers see high demand for a product and increase the price to take advantage and to prevent a shortage). This often happens across the board in a situation like this, but there are certain key drivers that can cause other prices to increase (things like the price of oil, which affects transportation costs and thus the price to have anything shipped anywhere, whether it be the raw materials you need or the finished product you're selling). With the injection of so much money into the economy, rampant inflation would normally be the result. However, there are other variables at play in this particular situation. Chief among them is that no matter how much cash is in the economy, most of it is being sat on, in the form of cash or other ""safe havens"" like durable commodities (gold) and T-debt. So, most of the money the Fed is injecting into the economy is not chasing goods; it's repaying debt, replenishing savings and generally being hoarded by consumers and institutions as a hedge against the poor economy. In addition, despite how many dollars are in the economy right now, those dollars are in high demand all around the world to buy Treasury debt (one of the biggest safe havens in the global market right now, so much so that buying T-debt is considered ""saving""). This is why the yields on Treasury bonds and notes are at historic lows; it's bad everywhere, and U.S. Government debt is one of the surest things in the world market, especially now that Euro-bonds have become suspect. Currency Devaluation - This is basically specialized inflation; when there are more dollars in the market than people want to have in order to use to buy our goods and services, demand for our currency (the medium of trade for our goods and services) drops, and it takes fewer Euros, Yen or Yuan to buy a dollar. This can happen even if demand for our dollars inside our own borders is high, and is generally a function of our trade situation; if we're buying more from other countries than they are from us, then our dollars are flooding the currency exchange markets and thus become cheaper because they're easy to get. Again, there are other variables at play here that keep our currency strong. First off, again, it's bad everywhere; nobody's buying anything from anyone (relatively speaking) and so the relative trade deficits aren't moving much. In addition, devaluation without inflation is self-stablizing; if currency devalues but inflation is low, the cheaper currency makes the things that currency can buy cheaper, which encourages people to buy them. At the same time, the more expensive foreign currency increases the cost in dollars of foreign-made goods. All of this can be beneficial from a money policy standpoint; devaluation makes American goods cheaper to Americans and to foreign consumers alike than foreign goods, and so a policy that puts downward pressure on the dollar but doesn't make inflation a risk can help American manufacturing and other producer businesses. China knows this just as well as we do, and for decades has been artificially fixing the exchange rate of the Renmin B (Yuan) lower than its true value against the dollar, meaning that no matter how cheap American goods get on the world market, Chinese goods are still cheaper, because by definition the Yuan has greater purchasing power for the same cost in dollars. In addition, dollars aren't only used to buy American-made goods and services. The U.S. has positioned its currency over the years to be an international medium of trade for several key commodities (like oil), and the primary currency for global lenders like the IMF and the World Bank. That means that dollars become necessary to buy these things, and are received from and must be repaid to these institutions, and thus the dollar has a built-in demand pretty much regardless of our trade deficits.  On top of all that, a lot of countries base their own currencies on our dollar, by basically buying dollars (using other valuable media like gold or oil) and then holding that cash in their own central banks as the store of value backing their own paper money. This is called a ""dollar board"". Their money becomes worth a particular fraction of a dollar by definition, and that relationship is very precisely controllable; with 10 billion dollars in the vault, and 20 billion Kabukis issued from Kabukistan's central bank, a Kabuki is worth $.50. Print an additional 20 billion Kabuki and the value of one Kabuki decreases to $.25; buy an additional 10 billion dollars and the Kabuki's value increases again to $.50. Quite a few countries do this, mostly in South America, again creating a built-in demand for U.S. dollars and also tying the U.S. dollar to the value of the exports of that country. If Kabukistan's goods become highly demanded by Europe, and its currency increases relative to the dollar, then the U.S. dollar gets a boost because by definition it is worth an exact, fixed number of Kabukis (and also because a country with a dollar board typically has no problem accepting dollars as payment and then printing Kabukis to maintain the exchange rate)" "The Fed doesn't exactly have a specific schedule when they decide to create a new dollar. Instead, they engage in open market operations, creating and destroying money as is necessary to preserve a certain interest rate for lending and borrowing. It's an ongoing process. When the Fed meets periodically and they see that inflation is getting out of hand, they will raise that rate; when they see that the economy is weak, they will lower it. They change the target rate from time to time, but they seldom tell people exactly what they'll do in advance, aside from them recently saying that rates will remain incredibly low ""for an extended period of time"". There are people who trade futures contracts based on what they think these rates will be, and the Fed does publish information on what the market thinks the probabilities are. That's probably the closest thing to telling you ""how much and when"". If you want to know about the size of the money supply, ask the Federal Reserve; you probably want series H.6, Money Stock Measures. For an explanation of what the data series there means, ask Wikipedia: you're probably interested in M2, because that's what actually affects the economy, though M0 is closer to what they actually ""print"" (currency, bills and coins, and deposits at the central bank). If you're concerned about the actual real value of your dollar dropping, the actual value drop is better understood by looking at either the inflation rate, or an exchange rate against a foreign currency (and depending on what you were hoping to use that dollar for, there are a couple of different inflation rates). The standard inflation rate which measures what happens in your day to day life is the consumer price index, published by the BLS. There are a variety of forecasts of this, but I'm not aware of any official government-agency forecasts." Regarding the Summer of 2011 Crisis: There is NO reason that the United States cannot continue borrowing like it is just based on a particular ratio:  Debt to GDP. The Debt to GDP ratio right now is around 100%, or 1:1. This means the US GDP is around $14 Trillion and its debt is also around $14 trillion.  Other countries have higher debt:gdp ratios Japan - for instance - has a debt:gdp ratio of 220% Regarding a selloff of stocks, dollars and bonds: you have to realize that selling pressure on the dollar will make THE PRICE OF EVERYTHING increase. So commodities and stocks will skyrocket proportionally. The stockmarket can selloff faster than the dollar though. And both markets have circuit breakers that can attempt to curb quick selloffs. Effectiveness pending. Got some questions related to banks and cash, specifically required reserve ratio and capital requirements.  The way i understand it is, a bank is required to hold a percentage of money it has loaned to other people (required reserve ratio).  Example: If the rrr is 10%; i give the bank 100k, because it is only required to hold 10% (10k) it loans 90k to my neighbour, neighbour buys a car from the dealership, the dealership banks the 90k.  now the bank can loan 81k of the dealerships 90k. The bank loans to businessman who buys land worth 81k, land owner banks the 81k.  So the bank received 100k from me to hold and protect, loaned 90k to bob,recieved 90k from dealership,loaned 81k to businessman, recieved 81k from land owner.  100k+90k+81k = 271k bank over time will receive another 90k from bob, and 81k from business man + interest. This all assumes there is 1 bank, and all these people put there money in the bank not keeping cash.  In my native country we have no required reserve ratio, we have a capital requirement. On our central bank website it states a total capital ratio of 8%.  A capital ratio is equity + (profit-money given to shareholders) / risk weighted assets.  Question, how do you determine equity, profit, and risk weighted assets for a bank?  is equity the cash the bank has, profit the money from fees+interest, and risk weighted assets how much money the bank has in loans? "China's regulators, it seems, are on the attack. Guo Shuqing, chairman of the China Banking Regulatory Commission, announced recently that he'd resign if he wasn't able to discipline the banking system. Under his leadership, the CBRC is stepping up scrutiny of the role of trust companies and other financial institutions in helping China's banks circumvent lending restrictions.  The People's Bank of China has also been on the offensive. It has recently raised the cost of liquidity, attacked riskier funding structures among smaller banks, and discontinued a program that effectively monetized one-fifth of last year's increase in lending.  Are the regulators finally getting serious about reining in credit creation? The answer is an easy one: Yes if they're willing to allow economic growth to slow substantially, probably to 3 percent or less, and no if they aren't.    inRead invented by Teads  This is because there's a big difference between China's sustainable growth rate, based on rising demand driven by household consumption and productive investment, and its actual GDP growth rate, which is boosted by massive lending to fund investment projects that are driven by the need to generate economic activity and employment.  Economists find it very difficult to formally acknowledge the difference between the two rates, and many don't even seem to recognize that it exists. Yet this only shows how confused economists are about gross domestic product more generally. The confusion arises because a country's GDP is not a measure of the value of goods and services it creates but rather a measure of economic activity. In a market economy, investment must create enough additional productive capacity to justify the expenditure. If it doesn't, it must be written down to its true economic value. This is why GDP is a reasonable proxy in a market economy for the value of goods and services produced.  But in a command economy, investment can be driven by factors other than the need to increase productivity, such as boosting employment or local tax revenue. What's more, loss-making investments can be carried for decades before they're amortized, and insolvency can be ignored. This means that GDP growth can overstate value creation for decades.  That's what has happened in China. In the first quarter of 2017, China added debt equal to more than 40 percentage points of GDP -- an amount that has been growing year after year. In 2011, the World Economic Forum predicted that China's debt would increase by a worrying $20 trillion by 2020. By 2016, it had already increased by $22 trillion, according to the most conservative estimates, and at current rates it will increase by as much as $50 trillion by 2020. These numbers probably understate the reality.  If all this debt hasn't boosted China's GDP growth to substantially more than its potential growth rate, then what was the point? And why has it proven so difficult for the government to rein it in? It has promised to do so since 2012, yet credit growth has only accelerated, reaching some of the highest levels ever seen for a developing country.  The answer is that credit creation had to accelerate to boost GDP growth above the growth rate of productive capacity. Much, if not most, of China's 6.5 percent GDP growth is simply an artificial boost in economic activity with no commensurate increase in the capacity to create goods and services. It must be fully reversed once credit stops growing. To make matters worse, if high debt levels generate financial distress costs for the economy -- as already seems to be happening -- the amount that must be reversed will substantially exceed the original boost.  Once credit is under control, China will have lower but healthier GDP growth rates. If the economy rebalances, most Chinese might not even notice: It would require that household income -- which has grown much more slowly than GDP for nearly three decades -- now grow faster, so that the sharp slowdown in economic growth won't be matched by an equivalent slowdown in wage growth.  Clear thinking from leading voices in business, economics, politics, foreign affairs, culture, and more. Share the View  Enter your email  Sign Up But to manage this rebalancing requires substantial transfers of wealth from local governments to ordinary households to boost consumption. This is why China hasn't been able to control credit growth in the past. The central government has had to fight off provincial ""vested interests,"" who oppose any substantial transfer of wealth. Without these transfers, slower GDP growth would mean higher unemployment.  Whether regulators can succeed in reining in credit creation this time is ultimately a political question, and depends on the central government's ability to force through necessary reforms. Until then, as long as China has the debt capacity, GDP growth rates will remain high. But to see that as healthy is to miss the point completely." I'll give you a stark example of China's debt-driven construction growth: Since '09 China has constructed enough physical office space buildings to give every Chinese man, woman, and child their own cubicle - 3 times over! Given that these buildings were largely financed by debt, its hard to see how those creditors get all their money back given that there simply are not enough Chinese people to occupy and pay/rent that space in order for break-even to occur. "Stock market indexes are generally based on market capitalization, which is not the same as GDP.  GDP includes the value of all goods and services produced in a country; this includes a large amount of small-scale production which may not be reflected in stock market capitalizations.  Thus the ratio between countries' GDPs may not be the same as the ratio of their total market capitalization.  For instance, US GDP is approximately 3.8 times as much as Japan's (see here), but US total market cap is about 5.5 as much as Japan's (see here). The discrepancy can be even more severe when comparing ""developed"" economies like the US to ""developing"" (or ""less-developed"") economies in which there is less participation in large-scale financial systems like stock markets.  For instance, US GDP is roughly 10 times that of Brazil, but US total market cap is roughly 36 times that of Brazil.  Switzerland has a total market cap nearly double that of Brazil despite its total GDP being less than half of Brazil's.  Since the all-world index includes all investable economies, it will include many economies whose share of market cap is disproportionately lower than their share of GDP. In addition, according to the fact sheet you linked to, that index tracks only large- and mid-cap stocks.  This will further skew the weighting to developed economies and to the US in particular, since the US has a disproportionate share of the largest companies. Obviously one would need to take a more detailed look at all the weights to determine if these factors account precisely for the level of discrepancy you see in this particular index.  But hopefully that explanation gives an idea of why the US might be weighted more heavily in a stock index than it is in raw GDP." "I am not an expert in this stuff, but my understanding is that the debt is in the form of US treasury securities, which mature at set rates and are paid at maturation.  So technically, the US Treasury ""pays off"" a portion of its debt whenever the debt securities mature.  Thus, if China (or any country) buys new Treasury securities at a slower rate than its currently held Treasury securities are maturing, the amount of US debt held by China will decrease.  This is what I hear China has been doing recently."