Elon Musk Is Right About Debt… But Dead Wrong About the Solution | Digging into China

Hi, I'm Dong Xiong. Welcome to Digging into China, where we take a deep dive into what's really happening in China and share some unique insights. According to a Wall Street Journal article published on May 1, titled National Debt Now Tops 100% of GDP, the U.S. national debt has now surpassed 100% of GDP, crossing a symbolically significant threshold for the As of March 31, publicly held debt stood at $31,265 billion, while GDP over the preceding year was $31,216 billion. That pushes the debt-to-GDP ratio to 100.2%. And this number is expected to keep climbing, driven by persistent annual deficits close to 6% of GDP. Right now, the federal government is spending $1.33 for every dollar it collects in revenue, with this year's budget deficit projected at around $1.9 trillion. Now crossing 100% doesn't automatically trigger a crisis, but it's a potent marker of the long-term fiscal pressures that have been building for decades. Lawmakers on both sides talk a big game about it, yet they keep choosing tax cuts and spending increases that offer clear short-term political wins. Interest payments already eat up one in every $7 of federal spending, and the government is getting more and more sensitive to every tick in interest rates. Economists are warning that without real cost corrections, America is heading toward debt levels that could crowd out private investment, drive up borrowing costs for everyone, and seriously limit future policy options. This isn't some temporary bump. It's structural, fueled by an aging population, big entitlement programs, recent tax cuts, and sustained high spending. So the big questions hanging over everything are about sustainability, political will, and the tough choices ahead. Now that's the Wall Street Journal article. Let's talk about debt. This is one of the most important and longest-running discussions in finance. Plenty of people around the world are warning that governments, companies, and individuals have borrowed way too much, creating enormous debt burdens that could trigger a crisis at any moment. That's the mainstream view you hear from most financial media and opinion leaders. But recently, one very big voice jumped back into the conversation, Elon Musk. Let's look at exactly what he said. In a recent podcast interview, Musk brought up the debt issue again. He basically said America is done for, finished, because the national debt is exploding. He pointed out that interest payments on the debt have now surpassed the entire military budget, which itself is already over 1 trillion dollars. So just the interest alone is more than a trillion. In his view, the US economy could collapse at any time, and the government could even default. Then Musk flips the script and says the only way out of this debt crisis is to develop AI and dramatically boost overall societal productivity. According to him, that's the one and only solution. His take sounds very much in line with what a lot of people already believe, so it got plenty of support and replies. But here is the thing. His view isn't entirely objective. In fact, it's somewhat misleading, especially when it comes to understanding debt, and it can easily steer the audience in the wrong direction. The truth is, having a lot of debt isn't necessarily a bad thing. It's not about the quantity, it's about the quality. There is good debt and bad debt, and this is a crucial distinction. Before we talk about any debt crisis, we need to get this straight. Let's start with the basic truth about debt. Every debt involves two parties. One person's debt is another person's asset. Let me explain with a simple example. If I lend you some money, that loan is my asset. I can earn interest on it. For you, the borrower, it's a liability. You have to pay it back with interest on schedule. But people don't borrow money for no reason. They have a purpose. Suppose you borrow money to buy a tractor, then use that tractor to farm the land. That debt has now become a productive investment. The money flowed from me to you, then from you to the tractor seller. It passed through three different balance sheets. On my balance sheet, it's a promissory note, an asset. On yours, it started as a pure debt. But once you bought the tractor, that tool became an asset. So your original debt turned into something productive. At the end of the day, debt is really just an accounting method. It's a record of how wealth is flowing between different balance sheets. That's all it is. From an accounting perspective, one person's debt is another person's asset. They are two sides of the same wealth, just appearing on different balance sheets. So debt isn't only a burden, it also represents the A British economist named Wayne Godley proposed a famous debt identity. His idea is basically what I just described. In a closed economic system, one sector's deficit is another sector's surplus. Take a country for example. Every dollar the federal government spends eventually turns into financial wealth for the private sector and households, because they directly or indirectly use that government debt to buy productive tools and boost production. Godley's theory can even be expressed as a mathematical equation. Private surplus equals government deficit plus current account surplus. On the right side of the equation, the deficit and the current account surplus are closely linked. A current account surplus means the country is selling more goods abroad and earning net profits, a direct reflection of its productivity. Government deficits are also originally meant to increase domestic productivity. For instance, government deficits can be used directly for investment, creating jobs and boosting growth. They can fund infrastructure and social welfare programs. These things give workers more security, improve the business environment, and indirectly raise overall productivity. Both channels ultimately increase people's wealth. So following this logic, what actually defines an economic crisis or recession? Going back to the equation, a crisis means the private surplus on the left side drops sharply, and the two main reasons that happens are declining on the right side, either the government cuts its deficit or the trade surplus falls. Either one can trigger a crisis. When you apply this debt identity theory to today's reality, you realize something important. The US government basically cannot implement a drastic debt reduction right now. Why? Because that would mean fiscal austerity, and once you do that in America's current situation, a crisis would hit almost immediately. America has long been a consumption nation, not a production nation. Its economy is heavily hollowed out, and its current account has run deficits for years, trade deficits that at their peak approached 6% of GDP. That hasn't fundamentally changed even today. So if you can quickly improve the trade balance and you also slash government debt and deficits at the same time, private sector surplus would collapse, and boom, you get a crisis. Looking at recent news through this lens, whether it's Musk criticizing America's excessive debt or the IMF urging big spending cuts, both are one-sided and misguided. If America actually followed that advice as reported in the media, it would trigger an immediate economic crisis. The real point is this. Debt itself is not the problem. The problem is what kind of assets that debt is buying. Is it being used to purchase productive assets or worthless non-productive ones? Go back to my earlier example. If you borrow to buy a farm tool and grow crops, that's good debt. It has real economic output. But if you borrow to buy casino chips in Macau, lose it all gambling, or blow it on luxury nightlife and endless partying with no return, then it's pure bad debt with zero economic output. Right now, America's government debt has reached $32 trillion, over 100% of GDP. In the Eurozone, the average is over 81% of GDP, with Greece above 140%, Italy above 130%, and France and Belgium both over 100%. So with all these massive government debts in the West, are they mostly good debt or bad debt? Official statistics show most of the spending goes to social security, healthcare, and military budgets. But in reality, an increasing portion of national debt today is being used to buy low-quality, zero-return assets, things like overly lavish welfare policies and all kinds of big giveaways done in the name of equality. A large chunk of it is essentially feeding a growing population of giant babies, people with no economic output. That makes it unsustainable bad debt. Mainstream media loves talking about the size of the debt, but they deliberately avoid discussing the quality of the asset behind it. That's classic misdirection, avoiding the real essence of the problem. I mentioned the welfare program earlier. People often assume welfare has no economic output. But when these systems were first designed, they were expected to produce positive returns. The idea was to make society better, give workers more security and stability, so they would actually be more willing to work hard. But everything changes over time. No system stays exactly as designed. At its root, the problem isn't the system itself, it's the people behind it. It's human nature degenerating. It's this degeneration that has created more and more giant babies in society. These giant babies only want to enjoy, never want to work, never want to take responsibility. They only want rights. That is the real crux of the issue. Let me explain how welfare went from a system that was supposed to be productive to one that simply breeds laziness with zero output. This transformation is closely related to a concept in economics called the fiscal multiplier effect, first proposed by Keynes and others. Simply put, when something is kept within a reasonable range, it often produces excellent results with relatively small input, high multiplier. But once it exceeds that reasonable range, the multiplier drops sharply. What used to be highly effective becomes inefficient. You put in more and get less back. In the early stages, when welfare stays reasonable, it really can boost workers' motivation, sense of security, and a willingness to work. But once it goes beyond the proper limit, the multiplier starts declining. This pattern is universal. It applies to welfare and to debt alike. A research report from George Mason University, backed by plenty of empirical studies, shows a clear negative correlation between public debt levels and the fiscal multiplier. As debt rises sharply, the multiplier falls. In other words, debt's ability to stimulate the economy weakens as the total debt grows. Countries with debt above 60% of GDP have a fiscal multiplier of only 0.29. Countries below 60% see its rise to 1.1. From an economic standpoint, this means debt levels and economic growth have a negative relationship, especially when debt gets too large. Apply to the real world. As debt keeps rising and welfare spending climbs higher, we see economic growth slowing and more and more giant babies being cultivated in society. These giant babies are the real-world manifestation of a falling fiscal multiplier. At least in Western societies today, modern cities have become incredibly comfortable places, full of security and life's guarantees. But that very comfort no longer motivates people much. Instead, many prefer to enjoy existing wealth rather than create new wealth or take on any responsibility. When people just lie back and enjoy without working, without taking risks or responsibility, they gradually turn into giant babies. Mainstream economy says that once the debt-to-GDP ratio exceeds 100%, the fiscal multiplier drops to its lowest point and the stimulus effect on the economy becomes almost zero. As I mentioned earlier, both America and many European countries have already passed 100%, some much higher. This creates a painful dilemma. Logically, when debt is this high and the multiplier has collapsed, you should cut debt immediately because it no longer drives growth. It's just a pure financial burden. But as we saw at the beginning, Western countries don't dare cut debt aggressively because doing so would likely trigger an immediate crisis. So here is the trap. You should reduce debt in theory, but you don't dare in practice. It's extremely difficult to handle. The only feasible way out is to keep high debt levels while actively changing the nature of that debt, increasing productive good debt and reducing the non-productive bad debt. This is exactly why the US government is now pushing hard on AI and trying to revive domestic manufacturing. In debt terms, they are trying to convert bad debt into good debt with real economic output, and AI is their chosen tool for that transformation. Whether you look at it through the fiscal multiplier lens or the debt identity equation, America is trying to develop manufacturing and improve its current account balance without drastically cutting the government deficit, in order to increase overall national wealth. I hope this is clear. The theories we've covered today can all verify, from different angles, the motivation and expected results behind current US economic policies. This is essentially the only practical way to resolve the debt dilemma. But there is a cost. While doing this, America's economy is shifting toward a government direction, moving away from traditional market-driven activity. This top-down model actually goes against the original spirit of America's founding. Yet, at this point, they have little choice. Because during decades of debt and welfare expansion, although productivity rose a lot, it also created a massive population of giant babies. These giant babies are American citizens and voters. They hold real political power through their ballots. So whether it's Trump, Biden, Obama, or anyone else, politicians have to ponder to these giant babies voters. They have to please the people who only want to eat and not work. Therefore, America's real problem is not too much debt, it's too many giant babies and too few diligent workers and true risk-takers. For America and other developed economies, the soft-landing they hope for isn't really an economic soft-landing, it's a soft-landing for the giant baby population. They want to use AI and other productivity-enhancing technologies to make these giant babies more comfortable. The more comfortable they are, the more likely they are to vote for you. In the West, the greatest value of these giant babies is that they are voting machines. Whoever can keep them happy can realize their political ambition. That, unfortunately, is the current state of the Western world. As for the East, especially the self-proclaimed Great Eastern Power, there are no giant babies there. The people living in that country are merely extensions of leadership, like their prosthetic limbs and organs. Now, come back to Musk's interview at the beginning of the program. He first criticized the government's excessively high debt, then offered the solution, develop artificial intelligence. According to his logic, if we just advance AI and technology fast enough and keep these giant babies well-fed and comfortable, everything will be solved. From these remarks, you can see that Musk is a very shrewd and intelligent man. He criticizes the government, politicians, the country, the economy. He criticizes everything, but he never criticized the giant babies. Why? Because those giant babies are potential customers and potential supporters. He needs them to get where he wants to go. However, his approach ultimately treats the symptoms but not the root cause. Because at the end of the day, a country is still a country of people, not of AI. No matter how advanced its technology and AI become, if the people themselves degenerate, if they lack responsibility, if they only seek pleasure, and if they ignore all consequences, then that country is destined to decline and eventually fall. In the end, neither AI nor Elon Musk can save humanity. Before I wrap up today's episode, I want to address something some of you might be thinking. This is digging into China. Yet today, we've spent almost the entire time talking about America's debt and its giant baby problem. Why? As for China, the situation is even more serious. China's real debt burden is actually much heavier than that of the United States. When you include local government debts, financing vehicles, corporate borrowing, and all the off-balance sheet obligations, China's total debt load is a far larger relative to its economy. The difference is that America's problems are openly discussed with transparent numbers, while China's are more hidden and harder to measure precisely. That's why I chose to examine the US case in depth today. By understanding how difficult it is for America, despite having the world's reserve currency to manage its debt and the social consequences it has created, we gain a clearer lens through which to view China's own even more challenging debt situation. And here is the uncomfortable truth. China also has its giant babies. But unlike in the West, China's giant babies are not ordinary citizens or voters. They are the CCP party members, the officials and connected elites who enjoy privilege and power while producing little real value. In the West, giant babies demand welfare. In China, they control the system itself. Sometimes digging deeper into China requires first looking honestly at the other side of the equation. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.