To say the Japanese have had a rough decade or two is a massive understatement. It wasn’t that long ago when alarmists were predicting the Japanese would end up owning most of the United States. How things change.
As I write this, Japan has just suffered through the fifth biggest earthquake ever recorded. The videos of area are simply brutal and you really have to feel for these folks. The explosion at the nuclear plant can’t be a good thing either. The total devastation along the northern coast of the country is going to call for a huge cleanup effort and billions in funds. As always, countries will step up and help all they can and that helps reassure one about the core humanity in all of us.
The cost of cleanup also inevitably leads one to the inevitable question of how Japan survives given its debt problems. The country carries a national debt load over roughly 200 percent gross domestic product. The problem with high percentages like this is not the number itself so much as the cost incurred in servicing it in the form of interest payments. Put another way, Japan must spend huge amounts of money on paying the interest on its debt that could otherwise go to more worthwhile items such as education, infrastructure and, sadly, earthquake and tsunami damage repair.
Japan faces a major debt crisis. The question is when exactly will it occur? Nobody knows for sure because of two factors that keep the crisis from spreading. The first is the interest rate on the debt. Japan currently is paying out at about 0.3 percent. How does it keep the rates so low? Japanese companies buy Japan’s debt instruments in huge quantities as a matter of public duty. It would be somewhat akin to Microsoft, Apple and Google all buying tons of United States treasury notes. At some point, however, even this corporate effort will not win out.
If we don’t know when Japan will have to face up to its debt, why mention it? Well, Japan is considered to be about 10 years ahead of the United States in relation to debt developments. As a result, we can look at Japan to get a taste for what will happen. Our debt is now about to exceed 90 percent of GDP, the percentage where things start becoming very strained economically. The question is what will happen?
It would appear that the powers that be in the United States are taking a similar approach to Japan. As you’ve probably noticed, the Federal Reserve has slashed the borrowing rate to what is effectively zero percent much like the Japanese did. Alas, it seems unlikely that corporations in the United States will step into the breach and start buying U.S. debt. The Federal Reserve realizes as much and has acted. It is now buying United States debt. If that sounds like a Ponzi scheme to you, let’s just say Bernie Madoff is snickering in his cell.
The last decade was considered a “lost” one for Japan from an economic point of view. The question many in the United States must now ask is whether we face a similar type of decade or are reading to take affirmative steps to deal with our debt problem. One look at the political situation in Washington does not give one much hope for a rationale plan to deal with it.
Mark P. Warner writes about the U.S. national debt [http://www.currentusanationaldebt.com] problem for CurrentUSANationalDebt.com.