What do you mean by “save”? Maybe it seems like a dumb question, but you’d be surprised. For example, by “savings”, some people mean “money not spent”. Others mean money spent on things that last a long time. So depending on which one you mean, the problem looks different. Assuming there is one.
Another way to look at a trade deficit is as a money surplus. There’s an extraordinary demand for US dollars, and we’re the supplier for that demand. In fact, we have a monopoly on the product. We’re sort of like the Saudi Arabia of dollars (except that dollars are a lot easier to make, and we will never run out of them). Anyway, if that’s true, how does being a dollar exporter hurt us?
If foreigners having dollars now doesn’t hurt us (and maybe I’m wrong, maybe you think it does hurt us?) how does foreigners owning promises to get dollars later hurt us? In other words, what’s the difference between China owning a dollar and a $1 bond?
Is foreigners investing in America bad for America? (Not saying that you’re wrong - just asking.)
Anyway, I can’t tell if you’re saying we should be more like Japan or less like Japan. Or maybe more like Japan by saving more, but less like Japan by borrowing less?
What if I told you that Japanese saved more because.their government borrowed more? In other words, that their savings and government debt were actually the same thing?
The idea that Japan isn’t the same as Greece because Japan owns 95% of the debt is correct. Unfortunately, there is a lot of dated images of Japan in this thread.
Japanese savings rates are falling, and are less than the US. Part of this is due to the aging population and part to the really piss-poor economy. An interesting tidbit: Salaries are set so about 25% to 40% of the salary is given as a “bonus” twice a year. The bonus depends on how the company does and is not typically tied to the employee’s performance. With companies doing really bad, employees’ wages actually go down, which isn’t typical for non-sales full time employees in the States. And lots of other reasons, which is beyond the scope of this post.
Another major factor is the beginning of the retirement of the baby boomers, with the oldest ones turning 60 in 2007. Comparing the curves, Japan had a much stronger spike than the US for her baby boomers. Also, Japanese companies are set up so that many people first “retire” at 55, get a cash lump sum payment (no retirement) and then continue working for another 10 years at a lower salary. It’s assumed that they are living with their oldest son and his family so when he’s getting old enough to help with the family income the worker doesn’t need as much money.
Anyway, the spike of baby boomers got their huge lump sums in the early 2000s, and then are making less. So, less cash saving.
This leads us to The Problem[sup]TM[/sup] which is that at some point, there isn’t going to be enough savings by the Japanese to fund the national debt. And when that happens, the government will have to make their bonds attractive by offering more than the current 0.8% for a 10-year bond.
What will happen next is that interest rates will increase, which is going to really hurt us, the home owners (well them, the home owners, we’re selling) as many, many people are financing their homes with floating interest loans. We are paying 1.015%! Insane. Five years into our loan, and 75% of the payment is going to capital. People are purchasing more expensive homes than they can afford (sound familiar?) because in this case the interest rate are so low that they can get away with it, for now.
Japan had one bubble collapse in the early 90s and it took over a decade to start to recover, only to get shot back down after the “Lehman Shock.” Getting hit again is not going to be pretty.
Things are OK for now, as long as everyone plays ostrich with their heads firmly in the sand. Newly elected PM Abe has promised yet another stimulus package which will likely bring another score of bridges to nowhere. Yeah.
Some of the debt in Japan is insanely stupid. Many local governments can’t afford to pay the huge one-time retirement payments and are issuing bonds for that. Nothing like saddling your youth for nothing they will benefit from.
I’m not optimistic about the economic future of this country.
Huh? Not the case.
China is the overwhelming choice for outsourcing. Also, Japanese wages have remained fairly stagnant and the US is catching up or surpassing them.
It’s negative. The problem is that they are still trying to live in the 1960s, with the vast majority of heir highly educated and skilled female work force leaving it to raise their kid. More available and affordable day would be much more benefitial than swinging open the bamboo gates.
And more bad news is that because of the debt level, they are having to raise the consumption tax from 5% to 8% next year and 10% in two years. The last time they raised the consumption tax it caused a mini recession.
Funding the debt through the central bank means inflation. Currently some inflation would probably be good for the Japanese economy, but monetizing the whole debt could lead to inflation that is higher than the interest rates on the debt. Thus the bond holders are losing money. When bond holders are foreigners the response is “screw you, that is what you get for trusting us.” When bondholders are domestic that becomes alot harder because bond holders vote and screwing large amounts of voters is not something governments usually do unless they can’t help it. So while theoretically it is a simple move to pay off the debt with inflation, Japan is going to have to a hard time in reality.
In a related story, I fell off a ladder last month. The fall did not hurt at all but the sudden stop at the end was very painful.
U.S. and Japan’s problems are quite different. I don’t have a crystal ball to see the future, but to me Japan’s situation seems more stable and lacking in “malaise.”
Fascination with paper dollars isn’t guaranteed to last forever; these days one hears frequent grumbling and talk of alternatives. Not all foreign-held dollars are used to buy bonds. Some are used to buy other American assets, e.g. stock shares, which will be self-limiting.
If something can’t go on forever, it won’t.
I won’t try to predict when the dollar will weaken, and there are many much more important long-term problems. But it’s wrong to blithely assume deficits can continue indefinitely without consequence.
America can quite happily run a half trillion dollar deficit in perpetuity without it making their debt:GDP situation any worse. Once the economy has recovered a little more that’s where we’ll be in a couple of years.
If the Chinese or whoever decide they don’t want dollars anymore, what sill they do with them? Will they come to us and demand we take our dollars back, in exchange for goods and services? Is that a bad thing?
I am NOT predicting any Armageddon. Moreover, I’ll cheerfully concede that many of the world’s countries have problems far worse than America’s.
I AM predicting that sooner or later (maybe later) inflation and interest rates will rise. Those who insist that the long-bond market tells us this is untrue are victims of the usual “tulip bulb” delusion, and ignoring the effects of government activities measured in tera-dollars. (I AM curious what the smartest investors are doing, beyond the obvious real-estate buys, etc.)
One issue is that of reporting, investors simply do not trust Greek reporting and do not hold out much hope that they will do anything of their own volition to set policy changes, or to implement them. They only take minimum corrective action when forced to by external bodies.
As soon as things appear to be going better they will just simply slack off again.
Both are extremely low and can hardly do anything except go up.