Back in the `90's the economy was roaring along thanks to the availability of gobs of venture capital. Tech companies were receiving insane evaluations and the only way that a VC could get a piece of any company was to give them a large chunk of cash so that they could own a significant percentage of the business. If they gave a small amount of money, they would hold a significantly lesser portion of the business and not have as many members on the board or have the voting rights.
Why were they given insane evaluations? Because of the promise of a huge payout. How much money would you invest in Microsoft in the early `80's if you could? Or Cisco before the crash? If I could guarantee a 10 fold increase in your money over a couple of years, wouldn't you give me every dime you had?
The companies, flush with cash, did a lot of foolish things with it. They hired droves of employees that they didn't need because they thought if they didn't grab them someone else will and they are going to need them because they are going to big someday. They also paid out generous bonuses to the founders and to some extent the employees themselves. Everyone was happy until one day someone realized that it was all based on illusion. Then the VCs started to ask for a return on investment. Then the bubble burst.
In the same way, the US government is doing the same thing with China.
As has been mentioned on this board several times, a major chunk of our national debt is financed by foreign central banks. 30% in fact. Of that, the major investors are China, Japan and Taiwan. This means that whenever the government borrows money, it is going to the central bank of China to get the loan. Think about that for a minute. Not only are we maxing out our credit cards, but many of those cards are held by foreign countries (what's in your wallet?).
What does it mean to have so much of our debt in the hands of foreign central banks? Well, it means that they hold the mortgage on the US government. Any new expenditure that this government wants to do will be financed by debt. Even if we have a sudden explosion in the economy, bigger than the `90's, we still will not have a surplus in the US budget. That means that we have to finance it. This, indirectly, gives these foreign powers veto power over those expenditures. Star Wars to combat the growing ballistic missile threat from China? Sorry, the Chinese will probably not finance that. In short, the debt can be a serious blow to national security.
The reason why we can get away with this is because the US dollar is the de-facto currency in the world. As a result, our bonds are considered the safest investment in the world (in other words, the rating is higher than anything else you can invest in). China and Japan can take the excess dollars from our trade gap and turn around and buy our government's mortgage. This in turn causes the US to spend more, which trickles down to consumers which causes them to by more imports from Asia. Everybody is happy, until they realize that it is based upon the illusion that US bonds are secure.
But now we are spending like "Drunken Sailors" (John McCain). This means that our debt is getting larger and larger. Someday, we will have to pay it off. However, immediately, we have to start paying interest on it. This is called `servicing the debt.' This not something we can reduce unless we pay off the debt to which the interest is being paid. This in turn actually increases the debt even more. It is kind of like getting another loan in order to pay off the interest on your credit cards.
As we saw in the `90's, when the evaluations of companies who were in massive debt finally came back to earth, the bubble burst. If we continue to run these huge deficits, the evaluation of the US government will have to come down. There is no foreseeable way to pay off the loans. Then we will see the bubble burst. And it will be ugly. Maybe the total collapse of the US financial structure and in turn the world financial structure. Someday, somebody is going to take their bets off of the table.