Pethokoukis, Economics, U.S. Economy

What does this terrifying debt chart portend for America’s future?


OK, so another scary debt chart. At least we’re not Japan, right? The OECD projects Japan’s gross general government debt-to-GDP ratio will hit 231% in 2014. Not only is the US is nowhere near that level — and might not be even a generation from now — but Japan seems to have little trouble handling its much higher debt levels.

But maybe not for long. From “Why hasn’t Japan’s massive government debt wreaked havoc (yet)?” by Charles Yuji Horioka, Takaaki Nomoto, Akiko Terada-Hagiwara:

The current situation is even more tenuous than appears at first blush. The increasing share of foreign holdings and the shortening of maturities on Japanese government securities – especially on foreign holdings – increase the difficulty of rollover and the risk of sudden reversals in trends, as we are now observing. Additionally, the household and private saving rates in Japan can be expected to decline even further due to the aging population, meaning that domestic banks and insurance companies will not continue to have sufficient bank and postal deposits, insurance policies, and pension funds from the household sector to invest in Japanese government securities. … To answer the question in the title of this column, Japan’s massive government debt has not wreaked havoc in the past because of robust domestic saving, especially household saving (and, in more recent years, corporate saving) and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may wreak havoc in the future as both of these factors become less applicable unless the government debt-to-GDP ratio can be brought under control quickly.

Or maybe investors will continue to plow money into Japanese and America debt, treating it as a safe haven asset. Maybe Japan, along with the US, is one of Brad Delong’s modern Medici banks:

The Medieval Medici Bank doesn’t pay you interest. It charges you fees. You don’t lend it money in order to boost your wealth. You lend it money in order to keep your wealth safe–so that if the Pope excommunicated you and you had to flee the city of Lucca in the dead of night with only the clothes on your back, when you got to Paris you could draw on the local Medici bank.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

3 thoughts on “What does this terrifying debt chart portend for America’s future?

  1. It may be that due to the free market supply and demand for capital—and heavy savings rates globally—that interest rates star hugging zero.
    There is nothing in free markets or capitalism that says you are entitled to a return, indeed the opposite, without a government guarantee savers are always at risk for losses.
    Japan needs to monetize much of their debt, and the USA would be wise to embrace moderate inflation.
    So far, in the USA, monetizing debt through QE has resulted in no inflation, indeed we are at record lows…
    Who knew?

  2. AS to -
    “So far, in the USA, monetizing debt through QE has resulted in no inflation, indeed we are at record lows…
    Who knew?”.
    Wait… QE debt monetization WILL result in inflation – and it already has – go to the grocery store and witness how incrementally prices are marching ever higher.

    Another thing: the ONLY thing keeping a lid on the (weakening) purchasing power of ever increasingly phony fiat US Dollars is FEAR of the alternative. That is, what financial structure will replace the upcoming hypothetical zero-value US Dollar as the current world reserve currency?

    • You are not correct in regards to inflation. You are trying to connect a straw man argument of what has happened do to crops– not money supply.

      Contrary to popular belief, broad money supply hasn’t skyrocketed! If QE hugely increased the overall money supply, like many assume it has, then M2 and M4 would have grown at least as much as M0, if not exponentially more.

      When QE ends, M0 will grow at a more normal, lower rate—the Fed isn’t yanking reserves, just not creating them at a torrid pace. More importantly, without Fed pressure on long rates, banks’ profitability should rise, encouraging them to lend more—resulting in more M2 and M4, not less. The UK demonstrated this last year, after QE ended there. After four years of weak M4 growth (including a two-year contraction) during QE, UK M4 accelerated. The US likely follows suit.

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