May 23, 2009

Can America Borrow Now Like Japan Borrowed During the 1990s?

Public debt 2004
Country	Debt (% GDP)
Malawi	235.7
Lebanon	185.1
Japan	154.6
Jamaica	145.6
Zambia	133.6
Seychelles	129.3
Nicaragua	125.3
Serbia and Montenegro	123.2
Israel	108.6
Italy	106.4
Singapore	106.4
Sri Lanka	105.1
Belgium	102
Egypt	101.8
Greece	100.9
Saudi Arabia	94.6
Jordan	92.7
Syria	89
Moldova	88.4
Sudan	87
C�te d'Ivoire	82.5
Turkey	78.7
Canada	77
Philippines	77
Morocco	76.2
Panama	73.3
Indonesia	72.9
Pakistan	72.7
Qatar	72.7
Papua New Guinea	72.4
Croatia	69.1
France	68.8
Austria	67.6
Argentina	65.7
Vietnam	64.3
Germany	64.2
Kenya	62.9
Spain	62.7
United States	62.4

http://www.nationmaster.com/encyclopedia/List-of-government-debt

Your post reminded me of how different Japan seems today than when I was going to school in Tokyo in 1986. In 1986, the bubble was just getting underway. It seems hard to believe when you go to Japan today, but in the late 80s the level of conspicuous spending was amazing. Business men would talk about spending thousands of dollars a plate for a dinner. There would be drinks which contained actual flakes of gold. Books like “Japan as Number One” were best sellers. There were all kinds of predictions about how Japan would soon replace the US as the world's largest economy, and how the 21st Century would be the Japanese Century. In contrast to when I first went to Japan in 1978, there seemed to be a lot of arrogance in the air. Of course we all know now that this was a classic asset bubble (both stock and real estate), which ended very badly. Today, Japan feels much more like it did when I first went to Japan in 1978.

In the US over the last two decades, I think we have seen many of these same symptoms, as the US economy went through its two bubbles (dot.com and housing). In fact, I was kidding with a class here in Utah the other day that maybe we need to invent and arrogance meter. It is often said that it is impossible to tell that an economy is really in a bubble until after the fact. But, I said maybe an arrogance meter would be the best way to tell that an asset bubble is developing.

You point out one important difference between the economies, which is that throughout this period the Japanese savings rate has been much higher than the US savings rate. Trying to escape the post bubble recession, that has never really left Japan, the Japanese government has spent and spent and spent, running up huge levels of debt. http://www.nationmaster.com/encyclopedia/List-of-government-debt As you can see in 2004, Japan had the third highest government debt level in the world at 154% of GDP (following Malawi and Lebanon). The US was at 62% of GDP in 2004. However, as the US is now rapidly expanding its debt level, consider the difference in savings rates. With a high savings rate Japan was in a much better position to sustain such borrowing without igniting high levels of inflation (in fact Japan was trying to stop deflation). In contrast, the low US savings rate means that the US cannot sustain such high debt levels without borrowing actual savings from other countries. This makes the US much more vulnerable to a situation in which other countries refuse lend. If the US keeps borrowing by simply monetizing the debt (having the Federal Reserve simply create new money) at some point the US will trigger very high inflation.