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Home Publications Blogs Beat the Press The Burden of the Debt Depends on How You Measure It

The Burden of the Debt Depends on How You Measure It

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Tuesday, 22 January 2013 05:26

A Reuters article in the NYT told readers that:

"Japan's public debt burden is already the worst among major economies at more than twice the size of its $5 trillion economy."

While Japan does have the highest ratio of debt to GDP among wealthy countries, it also has one of the lowest ratios of interest to GDP. Its net interest payments are less than 1.0 percent of GDP. This number would be even lower if payments made to the central bank were subtracted out. (These are refunded to Japan's treasury.) By comparison, the interest burden in the United States is currently around 1.5 percent of GDP (approximately 1.0 percent after subtracting out money refunded by the Fed). It had been over 3.0 percent of GDP in the early 1990s.

The piece also warned that continued large deficits could raise interest rates and slow the economy. Actually this depends on what happens to the inflation rate. Japan has had near zero inflation or modest deflation for much of the last two decades. If interest rates rise, but the inflation rate rises by more, as is the explicit policy of the government, then real interest rates would decline. This would boost growth in Japan.

Comments (5)Add Comment
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written by skeptonomist, January 22, 2013 8:31
What is more important and more predictable than current debt cost is external debt. This is what can get countries in trouble and raise interest rates. Japan's position is good in this respect, and that of the US is not as bad as many other countries. The usual silly analogy of national debt with family debt is of value only to the extent that there is a net external debt - otherwise the national debt would be like family members owing each other.

If central banks could conjure up inflation at will that might be a good thing, but there is no good reason to think that they could do that - economists' claims about this are based on unsupported conjectures about psychological reactions to policy declarations. What will likely cause the next bout of international inflation is some kind of restriction in oil supply or of food or some other vital commodity. The consequences of this would not be so good. Although this happened in the 70's economists don't actually seem to have learned much from it, and there seems to be no sort of plan to deal with this kind of event in the future, except to raise interest rates.
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written by jbc, January 22, 2013 1:16
It's true, I remember as a young man in the late 80s/early 90s always hearing about the interest on the national debt, how much money went just towards paying the interest, we were supposed to think we could barely pay the interest, forget about making progress on the debt itsellf. You don't hear so much about the interest these days.
interest rates hopefully will increase
written by Blissex, January 23, 2013 5:12
«The piece also warned that continued large deficits could raise interest rates and slow the economy. Actually this depends on what happens to the inflation rate. Japan has had near zero inflation or modest deflation for much of the last two decades.»

Perhaps the causal link is the opposite...

The Japanese government may be terrified of a huge overhang of bad debts collateralized by bust assets in the financial system, and of surges in imports if growth resumes, and may have been pursuing a deliberate policy of recession for the past 20 years to keep nominal interest rates low and credit wildly abundant to keep the financial system going, asset prices floating, and to suppress demand leading to greater imports.

The UK government seems to be doing the same: because of wild asset price inflation in the UK most UK banks and in general the City are deeply bankrupt because they supported the bubbles with debt collateralized by ever increasing asset prices, plus the UK is no longer an oil exported but an ever bigger oil importer.

To reduce nominal interest payments supporting asset prices and reduce imports many years of recession seem to be the deliberate strategy.

That is, it is not low interest rates that are caused by the recession, but deliberate government action to keep the economy in recession to ensure low interest rates for government debt and most importantly financial sector debt and keep asset prices going.

«If interest rates rise, but the inflation rate rises by more, as is the explicit policy of the government, then real interest rates would decline. This would boost growth in Japan.»

It would be nice if growth was boosted by real economy factors like better productivity and higher demand, instead of income redistribution from savers to debtors...

Or more precisely from passive rentiers to speculative rentiers.
real v nominal
written by paine, January 23, 2013 6:46
you create an implicit iron law where sponge is more appropriate
:
movements in " interest rates..."" depend "...on what happens to the inflation rate."

let us simply say
that is assuming the BOJ decides to hold the real interest rate at least as high asw it is now

in fact one can well imagine the BOJ letting the real rate drop by holding the nominal rate at its floor level
and letting the real rate go as negative as possible....that is until
"a really ripping productive investment boom kicks in "
...
written by Calgacus, January 24, 2013 1:00
(Nominal) interest rates on government debt for a country like Japan are : exactly what the government says they are. If they want to control the whole yield curve - yes, they can do it - they have the technology. If the government of Japan wants it to be based on the number of fish sold in the Tokyo fish market - they can do it. If they want it to be set by bond auctions - yes they can do it.

This is obvious to anyone who devotes a moment's thought to it. As this is a process alien to almost all economists (astrologers), who prefer to babble with mathematics they do not understand, to arrive at predetermined conclusions to the greater glory of Mammon, they do not see it. It doesn't have to have a recession to fiddle with rates. Japan just has to decide what the rates are, and that's what they are. Japan is the monopoly issuer of all of its debt, currency and bonds included. QED


Skeptonomist is basically right about family vs national debt, but the real point is that they are not just analogous, they are exactly the same thing. We just say things about national debts which are obviously insane if we said them about family debts. How could a debt which family members owe to each other be a burden to the family as a whole? You have to be insane to think it can be. Only external debts to other families can conceivably be a burden. (Except in the indirect meaning that to the extent the internal family debts are "unpayable" they can endanger the requital of these debts and family stability)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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