In most discussions of the debt, deficit hawks threaten that the US is on the verge of bankruptcy, and that we are well down the road to becoming the economic basket case of Greece. And yet recent news about economic reforms in Japan should highlight something: it is universally acknowledged that Japan’s debt has stifled their growth, but it also goes without saying that Japan is still a damn fine place to live. The Human Development Index puts Japan in the same company as Switzerland, Hong Kong and Iceland… which is just tenths of points behind the US, Sweden, and other great places to live.
Since Japan’s debt levels are substantially higher than Greece’s, why hasn’t Japan descended into chaos? And why is our debt more threatening to our livelihood than Japan’s is?
Because Japan isn’t Greece, and they have a whole 'nother set of issues and problems. For one thing, they don’t have an issue with the average Japanese (or Japanese corporations) not paying their taxes. For another, their big issue actually revolves around their cultural predisposition for almost manic levels of saving…a problem that Greece sadly doesn’t share.
Also, very importantly, Japan can borrow in its own currency. When Japan’s debts are denominated in Japan’s currency, it means they’re nearly incapable of default because they can always print money to repay their debts. There are some reasons why they wouldn’t want to do this to an excessive amount, but essentially the possibility that Japan couldn’t pay its debts as contractually agreed is pushed entirely off the table.
Greece, on the other hand, uses the Euro as its currency, and cannot print Euros. In the worst case, Greece would be unable to pay its debts, defaulting on them. The risk that loaning money to Greece means you’d never get any of it back is much worse than the risk that loaning money to Japan means you’d get it back but it may not be worth as much as you want when you get to the currency exchange. This increased risk makes it difficult for Greece to borrow the money it would need to keep up basic services like police, let alone the social safety net.
Also, our debt is not more threatening to us (assuming you’re talking about America, though you don’t say so here) than Japan’s is. We also have our own currency, and have never defaulted on our debts, making investing in America’s debt one of the safest investments in the world. The only real danger here is if political intransigence leads us to voluntarily decline to pay our debts, as the Republicans were recently suggesting. This would be shooting ourselves in the foot for no gain.
In addition to what twhitt is saying wrt currency (Japan is in control of their currency, while Greece is on the Euro, so basically doesn’t have those levers to pull when bad stuff happens), Japan also has a population implosion going on right now, with Japanese (women in a lot of cases) immigrating out of the country. Their labor costs are very high, which means that a lot of their companies have outsourced and offshored (ironically, in a lot of cases to the US). In addition, they have high and increasing costs for their social safety net, which gets back into their aging population and low (negative I believe) population growth rate…and the fact that the Japanese aren’t really keen on immigration into Japan wrt citizenship/the franchise.
So, it’s just a different set of problems and issues than Greece is facing. It’s pretty grim though, as their debt to GDP is at historically bad levels…IIRC, it’s the highest in the industrialized world today.
Investors are willing to hold Japanese debt and believe they’ll be paid back in valuable currency. Investors are not willing to do the same for Greece (or Spain or Italy or …) Why the difference? I’m sure that currency plays a part, as **XT ** and twhitt have explained. Other things play a part too; trust, for instance. For years the government of Greece was basically running its finances on the Enron business plan. After that came to light, people stopped trusting them. The Japanese government seems much more trustworthy about its finances.
Whatever the difference, it’s worth remembering that five years ago, no one was predicting financial catastrophe in Greece (or Spain or Italy or …) Right now investors trust Japan to pay its debts, but who knows what will happen in the next five years. For that matter, who knows what will happen in the USA in the next five years. The fact that Japan has huge debts and is holding steady know should not make us confident that we can run trillion-dollar deficits indefinitely without consequences.
Something very important to note is that almost all Japanese debt (more than 95%, I believe) is owned by Japane citizens and companies. Basically, Japan owes a lot of money to itself, which makes its situation very different from that of Greece (or even, for that matter, the USA).
Mostly true about Japan, though some of the largest Japanese debt holders are state-owned organizations and not just citizens and private companies.
Also true on debt for Greece, not true for the US. Foreign holding of US debt is around 30% or so, meaning the US also owes most of the money to itself. Higher than Japan but vastly lower than Greece.
Price is a function of supply and demand. Interest rates are the price of borrowing money. Japan has low interest rates because its citizens trust the government to repay the money and like to save in something they think is safe. Thus their interest rates are low. These low interest rates mean that they can borrow alot more than other countries such as Greece. No one has confidence and trust in the government of Greece and so interest rates are higher. Since the price of Greek debt is so high they can purchase less of it and have to carry a smaller debt load. Thus the only choice is not spend as much.
The downside of Japan is that the government is going to find it very hard to repudiate debt owed to its own citizens. Thus if the ability to borrow ever is in doubt things are going to get very bad for Japan.
So, would it really be the worst thing in the world if the US were the next Japan, as opposed to being the next Greece as the debt hawks keep threatening?
Comparisons of our debt load to other countries are helpful but can be taken to far. The United States will be neither the next Greece nor the next Japan. It will be the United States. We can’t know exactly what will happen to our deficit, interest rates, economic growth, or anything else. We can say with confidence that throughout history, enormous deficits have not tended to be good for countries.
In addition to what’s been already mentioned I would assume it has a great deal to do with the fact that Japan manufactures and exports a shit ton of merchandise bringing capital into the country. Greece does not have the level of profitable indusrty Japan has.
If you earn $50,000/year and buy a $250,000 house your debt far exceeds your income but you are not bankrupt.
You are bankrupt when you can no longer write checks to pay your debt.
One of Greece’s other problems is tax evasion there is massive:
What’s more, the culture of tax evasion in Greece is so embedded that during one of their early negotiations for a bailout from the ECB Greece was told that promises of tax reform were completely off the table because history has shown they never manage to do anything about this.
As such it is hard for debt holders to see where Greece will get the money to service their debt.
I would also say that Japan can set its own economic policies to adjust the economy. I do not believe that Greece has the same freedom being a member of the EU.
I also think that the Japanese and the Hellenes accept different financial stuations. Japan is nortoriously accepting of a high cost of living and is much higher than Greece. In the US, we are not as accepting of high prices. Imagine what our situation would be if Americans were willing to accept a higher rate of inflation from issuing an extra 10% of our GDP in currency just to pay off the debt.*
*I’m not saying that it would be a good policy, but it illustrates that a nation’s policy is a function of what their citizens will accept.
The ability to borrow will never be in doubt in Japan because Japan doesn’t need to borrow. Or rather, it doesn’t need to borrow from anybody but itself. It’s fully capable of funding its debt through its own central bank, if it wants.
Bankruptcy occurs when a judge says it occurs. No judge will ever declare the federal government is bankrupt, so in that sense we can never be bankrupt. However, we already have a huge deficit and everyone expects it to continue growing quickly. We could soon reach the point where it’s a serious drag on the economy.
Right now, Japan’s Nikkei index is at about 10,000, which is 75% lower than it was 20 years ago. Here in the USA we’ve gotten used to a stock market that goes up over the long term. Before we rush to imitate the Japanese patterns of spending and taxing, we should keep that fact in mind.
This is simply not true. The deficit has been shrinking, not growing. It is expected to continue to shrink over the medium term. Cite. You will notice that the chart does not show a growing deficit, though the deficit was larger during the recession due to a depressed GDP and temporary spending. If you dislike Krugman’s analyses for some reason, here is the projection from a year ago (under some guy’s alarmist but nonsensical headline) which shows some possible outcomes. Note that we really came in between the two lines due to the January 1 tax changes, but this still reflects a shrinking deficit.
Calling USA the next Greece is much too pessimistic, but calling it the next Japan is probably too optimistic.
Japan’s citizens save. Americans don’t.
Japan holds its own trade-wise. America is running a huge trade deficit.
Japan’s huge debt is held almost entirely by Japanese. America owes trillions to foreigners.
Japan’s NIIP (foreign assets owned minus Japanese assets owned by foreigners) is, I think, the largest positive amount of any country. America’s is now the largest negative amount of any country.(*)
Japan’s government recently announced major infrastructure investment to stimulate their economy. This will have doubtful value, since Japan’s infrastructure is already excellent. America needs public infrastructure investment, but lacks the political will to achieve it.
(* - This frightening statistic may be misleading, since, by definition, America’s NIIP grows more negative as American assets appreciate relative to foreign assets!)