|
|
| weblog/wEssays archives | home | |
|
Tale of Two Debts/Deficits: Japan and the U.S. (October 9, 2006) 
One reads a great amount nowadays about how Japan has recovered from its "Lost Decade"
of deflation and financial malaise, but take a look at their Federal budget and tell me
this is a healthy government balance sheet.
How insane is the Japanese fiscal profligacy? Let me count the ways: 1. Fully 42% the government expenditures are financed with government bonds--i.e., borrowed from buyers of the bonds. This is deficit spending on massive scale. The U.S. government spends $2.4 trillion a year; 42% of those expenditures is about a $1 trillion. To equal the Japanese deficit spending, the U.S. would have to be running a deficit of $1 trillion-- about triple the current deficit of $300 billion. 2. A decade of such profligate deficit spending has created a staggering national debt, which costs the Japanese central government 18.4 trillion yen in interest payments--and this is in a nation where bonds pay a meagre 1% or so. Even at these absurdly low interest rates, Japan spends over 22% of its annual budget on interest on its national debt, even as it borrows another 34 trillion yen each year to the debt. $1 = 119 yen, so 34 T yen = $280 billion) 3. Japan spends 42% of its tax receipts (income) on interest payments alone; for Japan to actually balance its expenditures with income rather than borrowed money, it would essentially have to double its national tax receipts. (Note that Japan's GDP is about $4 trillion, compared to the U.S. GDP of $12.5 trillion. Japan has about 130 million citizens, while the U.S. has just topped 300 million citizens.) If the U.S. were to pay the equivalent percentage of its expenditures on interest payments, that would come to $528 billion--an astonishing sum. If Japan's runaway deficit spending and debt explosion is evidence of "fiscal health" and a "healthy economy," exactly what does a death spiral of debt look like? 100% deficit spending? In my book, borrowing 40% of your national buddget and devoting 40% of your tax receipts to interest on your national debt is fiscal insanity, not "health." 
So does that mean the U.S. deficit and interest spending is benign? Hardly. The road to
ruin lies just ahead. As
The New York Times reported:
The government’s interest bill is expected to rise to $220 billion this year from $184 billion in 2005. In fiscal 2005, the government spent more on interest than it did on Medicaid ($182 billion). The Congressional Budget Office projects that the interest bill, after climbing nearly 20 percent this year, will rise 13.2 percent in 2007, to $240 billion, and more than 8 percent in 2008, to $270 billion. With each passing year, interest payments are likely to eat up a bigger chunk of total spending and crowd out other priorities.In other words: interest on our public debt already eats up 9% of U.S. government expenditures and over 10% of tax receipts, and can only rise as future deficits of $400+ billion a year keep adding to the total debt. And if interest rates rise to a historically typical range of 6 to 9% from today's 4.5%, then the costs of debt service could skyrocket. Here is the Treasury's accounting of the current national debt: debt to the penny and who holds it Here is the Treasury's accounting of the current interest expenses: interest expense ($400 billion) Why does the chart say $217 billion and the Treasury say $400 billion? The difference is the interest the government pays itself, more specifically, its trust funds like FICA (Social Security). The Federal government "borrows" all the money collected in Social Security taxes and promptly spends it, giving the Trust Fund an IOU for the funds. The $200 billion interest goes to these government trust funds. So while this $400 billion is technically accurate, what should really worry us is the interest paid to external, non-government owners of public debt, many of whom are foreign central banks or investors. "Deficits don't matter" is a mantra of the current administration. Oh really? Spending 10% of your income on interest and borrowing 12 - 15% of government expenditures doesn't count? Spending more on interest than on Medicare doesn't count? When does it count? When it's larger than Defense ($529 billion)? The not-so-visible difference between Japan's debt and the U.S. debt is that the Japanese are prodigious savers, and can fund their own debt internally. In other words, as long as the Japanese save 20% of their national income, then their individuals, insurance companies and banks can buy their government's 34 trillion yen in bonds and cover the annual deficit more or less indefinitely. But here in the U.S. we are saving -1% --yes, a negative savings rate for the first time since the Great Depression. We don't generate sufficient savings to fund our own government's deficits. We rely on foreigners to buy at least half of all outstanding Treasury bonds-- over $2 trillion, not counting OPEC money which flows in from London or the Caribbean and thus isn't counted as central bank ownership. Bottom line: the Japanese can continue running such staggering deficits because they can fund them with their own savings. The U.S. does not have that luxury. So what happens if for political or financial reasons, foreign investors and central banks stop buying U.S. bonds? Interest rates will have to rise to the point that someone steps up and willingly slaps down their cash for a fixed rate of return from the U.S. Treasury. Just because investors have been willing to do so for years doesn't make that a guaranteed bet. To count on what you don't control to fund your deficit and keep your interest payments low is the purest form of folly. For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
|
||
| weblog/wEssays | home |