[This is the fifth installment of a blog series Tom is writing on the national debt crisis. The first four are here, here, here and here. Related, see also our signature on this open letter. – CZ]
Many comparisons have been made between the financial crisis and economic downturn that produced Japan’s Lost Decades and the financial crisis and subsequent economic downturn that began for the United States in 2008. There are many eerie similarities, right down to the “cures” attempted by both governments. But there are also two major differences which should make any American wonder if we’ll even be able to last long enough for a Lost Decade before a much more serious crisis hits.
The first of these differences is the fact that Japan entered its crisis with a personal saving rate in the teens, which means that households were able to buy much of the debt taken on by their government. When household purchases are combined with those of pension funds, corporations, and the financial sector, virtually all of the Japanese government’s debt is held domestically. Even in the wake of the financial crisis, Americans have maintained a low personal saving rate of around 5 per cent, meaning that the Treasury can’t count on individual Americans to be buyers at its auctions.
In contrast, when the federal government ran up its huge war debt during WWII, the personal saving rate made a massive jump as rationing was enforced and countless paychecks were deposited into the bank accounts of military personnel who weren’t at home to spend them. By pushing the sale of war bonds, the U.S. government used the high personal saving rate to fund its deficits domestically.
Personal Saving Rate in the U.S.
(Source: Bureau of Economic Analysis)
Instead of American households, foreign buyers (and more recently, the Fed) have been absorbing enormous amounts of government debt. The fact that foreign buyers have so very many dollars with which to buy our debt is actually a result of the second ominous difference between our future and Japan’s past: Japan had us.
When Japan’s stock market and real estate bubbles popped, the country could still rely on being able to run huge trade surpluses with an economy even larger than its own. Even better, America was about to experience two straight decades of strong, often over-frenzied economic activity fueled by the “irrational exuberance” of the tech bubble and the housing bubble. The booming exports to the U.S. boosted GDP and created jobs, helping Japan to avoid a long period of outright contraction rather than mere stagnation.
Our federal government has been following the Japanese pattern in an effort to spark the economy into a new round of sustained growth. But even with Japan’s ability to finance its own debt and run huge trade surpluses – something not happening in the U.S. -- Japan’s debt has shot up to more than 200 per cent of GDP. Now Japan is simply forestalling the endgame. With our structural differences, it’s likely that if we follow down that path, ours will come much sooner.