Skip to main content

The difference between Japan and the US -- Sovereign debt

In 1984, the total Japanese sovereign debt as a percentage of GDP was below 20%. At the end of 2024, Japan's sovereign debt as a percentage of GDP was 229%. What happened in these 40 years? Quite simply, the Japanese were the first to employ quantitative easing to turbo-charge economic growth. It all started after the crash of 1987. Japan’s growth had been anchored on an unsustainable real estate market.

Japan, like many Asian countries, is a country of savers. The truth of the matter is, Japanese have consistently saved between 25% and 45% of their income, that money was put in savings accounts and pension designated savings accounts, to be used when they retire. In addition, the Japanese government never eases the rules for pension funds to invest in other things than domestic sovereign debt, or Japanese equities. The truth is, that over 90% of Japanese savings have been funding Japan’s debt. 95% of Japan's sovereign debt is financed domestically.

As of the end of 2024, American sovereign debt was slightly over 100% of GDP. far less than what Japan faced 25 years ago. And there ends the comparison. The reality is over 1/3 of America's sovereign debt is financed by overseas investors. Japanese, Chinese, and a lot of European pension funds, like the liquidity, and the reasonable return that US treasury bills offer.

Strictly speaking, America could easily double its debt to GDP ratio, and still be below Japan’s debt to GDP ratio. And yet the comparison fails. Firstly, America is incredibly dependent on foreigners to finance its debt. Principally, because Americans don’t save. The average saving rate in the United States is less than 5%, and the vast majority of savings are held by the one percent. The second problem, far more important, the absolute size of the US debt financing requirements. Currently, the US borrows  $37 trillion of which almost 15 is financed by foreigners.

The problem is as follows; there’s an absolute limit to the appetite of foreign investors for US debt. However, before they reach their limit, they will ask for high returns. Already, US treasury rates are far more expensive than many other Europeans and Asian countries.

The question therefore is, can America allow its debt to GDP to rise to 229% of GDP? It’s unlikely that the global appetite for US denominated debt will reach that level. Already, there are many signs that institutional investors are looking to diversify away from the US dollar.

Interesting times.


Comments

Post a Comment

Popular posts from this blog

what people get wrong about tariffs

 The issue is simple. What percentage of the economy is dependent on tariff goods? The truth, is that the US economy is far more closed than people understand. People genuinely believe that all manufacturing has ceased to exist in the United States all given to China on the altar of woke policy the truth can be further from That statement. Only about 15% of US GDP is related to foreign trade. Of that amount, slightly more than half is from Canada in Mexico. And half of that is energy. What that means, is that about 7% of US GDP is tariff dependent. The proof in the pudding, is how little money tariff generates. People think that 30 or 50 billion is a lot it’s not in an economy that has $3 trillion. The impact on the US economy will be less visible but not absent. Inflation hasn’t occurred yet first because tests have hardly started to bite, but more importantly it’s such a small percent of the economy. Now certain things are critical. The rare earth metals from China were critical....
Post a Comment
Read more

The end of Tesla?

 it takes a special kind of idiot, to think that he can antagonize his entire customer base, and think that it will not impact his business. When Elon Musk went to work for Donald Trump, and created the doge department, he antagonized every liberal, and these people represent 90% of his client base.That’s not a brilliant move. Now Elon Musk is worth hundreds of billions of dollar, so he shouldn’t care a great deal, however, he needs to care because of several other issues. The cyber truck has been a disaster, most have had to be recalled because of defective glue, it’s not a truck, it’s not a car, it’s noisy, relatively uncomfortable, but great as a development platform. What Tesla has learned in making car manufacturing more seamless is truly amazing. The problem was that Elon Musk was so pissed with the Democrats, and with Joe Biden, in particular because of some slight, which were just plain stupid too. By the way, that he decided to support with hundreds of millions of dollar, ...
Post a Comment
Read more

Demographics

 I am preparing a kind of family tree for our children so that they know where they came from.  In my family I am the only survivor, although my brother and sister died recently they were both in their seventies (a story I told already).    It was a fun process, but it provided more than that.  First, I married relatively young I was 26 when I married and nearly 30 when our first child was born.   I was looking at my ancestors.  On my mother's side, she had 6 siblings, Four died before the age of 30, two in war, and two from illnesses.  Only she and a single sister survived.   The two boys had a child each but they died in WWII, and the other sister died as an infant.   what is interesting is that every one of my mother's siblings had children in their early 20s.   I know that my mom was hardly 20 when my brother was born.    What is remarkable is that among our friends, we are the only ones to have fou...
Post a Comment
Read more