patrick.net

The author doesn't understand that Japan's debt is denominated in its own sovereign currency -- which it can theoretically devalue -- while Greece's loans are in Euros.

Japan's debt is truly stupendous but we here in the US devalued our old debt by a factor of 3 between 1967 and 1983 thanks to good ol' dollar devaluation. The national debt even went down a bit in real terms thanks to that wacky inflation in the late 70s.

Japan would LOVE to have the yen back up at Y240, where it belongs. Well, maybe not, given that it's still dependent on oil imports and getting all that cheap labor from China must be nice.

As for Japan's debt itself -- 909,000,000,000,000 yen debt . . . that's a lot of debt!

In 2020 there will be 22M men aged 20-50 . . . and the national debt will be around 1,200,000,000,000,000. (That's 1.2 quadrillion yen)

The per-man interest burden alone on this debt (@ 3%) will be Y130,000 per month, that's $1700/month just to meet the interest burden.

Maybe I won't be moving back to Japan this decade. Damn . . .

Now, 90% of this debt is owed to Japanese nationals, so what it really means is that Japan has sold debt instead of taxing its citizens enough.

We have a $14T national debt now, and by 2020 it will probably be $20T -- that's a $750/mo interest burden @ 3% for the ~60M men of working age in 2020.

I think I need to learn Canadian.

Thanks again, Troy. I had a feeling you would comment first. Most of your posts are informative. Let's see who else is interested in this topic. There is another link up there from Krugman at MIT.

I read through this post but I had to go back a bit to dig it up...some good stuff here.
http://patrick.net/?p=27340

cheers.

Debt that can be repaid with currency that you have the ability to print represents a tiny burden compared to debt that must be repaid with currency that you do not have the ability to print.

Kevin says

Debt that can be repaid with currency that you have the ability to print represents a tiny burden compared to debt that must be repaid with currency that you do not have the ability to print.

Troy is correct, Japan is a zero sum game. They borrowed from their citizens instead of taxing them. If America repays it's debt to the rest of the world by printing money there will be severe consequences.

bob2356 says

Kevin says

Debt that can be repaid with currency that you have the ability to print represents a tiny burden compared to debt that must be repaid with currency that you do not have the ability to print.

Troy is correct, Japan is a zero sum game. They borrowed from their citizens instead of taxing them. If America repays it’s debt to the rest of the world by printing money there will be severe consequences.

No. Japan can only repay its debts by:

- Raising taxes
- Printing money
- Cutting spending

The US can only repay its debts by:

- Raising taxes
- printing money
- Cutting spending

Who you owe the money to is irrelevant. What is relevant is how you are forced to repay it.

The vast majority of US debt is also owed to the american people. It is no different owing debt to a US citizen than it is a japanese citizen. It is slightly better to owe it to the social security trust fund or the post office, since you can default on those debts with few repercussions.

Kevin says

It is slightly better to owe it to the social security trust fund or the post office, since you can default on those debts with few repercussions

wat. "Defaulting" on $2.6T of SSTF bonds would have some serious repercussions.

SSA can't print money, it runs a cash business. Losing the ability to exchange its bonds back into the cash it used to buy them would result in total benefit payouts being frozen to current levels and future benefits gradually falling to 80% of present benefits in real terms (nominally, they might go up a bit still).

Plus I would hope the theft of $2.6T from working americans would have some blowback on the streets a la Greece, but perhaps you are right about that.

Actually, checking the numbers I see social security has $60B/mo in outgo vs. $53B in contributions, so without the SSTF savings they'd have to cut benefits 12% across the board right now, and much more as the baby boomers start hitting retirement age en masse this decade.

"Few repercussions"

@Troy

And the % amount Americans contribute to SS has even been recently cut for now, even when it had been in a shortfall before. Great.

American in Japan says

And the % amount Americans contribute to SS has even been recently cut for now, even when it had been in a shortfall before. Great.

The FICA cut is the same thing as a 2% tax cut (up to $2000) on all wage-earners, since they're just going to print up more bonds for the shortfall. Treasury just prints the ~$150B/yr interest the fund earns, same thing.

The net result is going to be another $100B dose of "Quantum Easing" essentially, injected into the economy in $8B/mo doses as people pay less FICA.

It's not a bad policy thing -- it's basically a mini "Helicopter Money Drop" that the economy apparently needs.

SSA has an immense amount of savings -- $2.6T -- built up since 1986. The problem is these assets are liabilities of the Treasury and thus Congress, and Congress has a great number of professional liars, thieves, and imbeciles in its ranks at the moment.

Great news:

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/01/26/national/w152643S26.DTL&type=politics

Yeah.
Silly me for thinking there is actually a separate SS fund waiting out there.

@Troy
Thanks for the link (on another post)

Have you ever checked out
http://www.japantoday.com　？

Troy says

Kevin says

It is slightly better to owe it to the social security trust fund or the post office, since you can default on those debts with few repercussions

wat. “Defaulting” on $2.6T of SSTF bonds would have some serious repercussions.
SSA can’t print money, it runs a cash business. Losing the ability to exchange its bonds back into the cash it used to buy them would result in total benefit payouts being frozen to current levels and future benefits gradually falling to 80% of present benefits in real terms (nominally, they might go up a bit still).
Plus I would hope the theft of $2.6T from working americans would have some blowback on the streets a la Greece, but perhaps you are right about that.
Actually, checking the numbers I see social security has $60B/mo in outgo vs. $53B in contributions, so without the SSTF savings they’d have to cut benefits 12% across the board right now, and much more as the baby boomers start hitting retirement age en masse this decade.
“Few repercussions”

Only that's not how SS actually works in practice. For several decades now, the general fund and the FICA funds have not really been separate. That's why they're all lumped together when discussing the budget.

So, what'll happen if that debt is defaulted on is just that the unfunded SS payouts will come out of the general fund, or taxes will be raised.

Under which administration did the SS budget get lumped in with the general budget? I had thought it was under the Reagan Admin...

Kevin says

So, what’ll happen if that debt is defaulted on is just that the unfunded SS payouts will come out of the general fund, or taxes will be raised.

If SS payouts are coming out of the general fund then they would be "funded", by definition.

Now, if FICA taxes are raised to make up for the disavowal of the $2.6T in bonds, then yes, that would be a default and theft of the money.

My money, actually, since my initial entry into the workforce was right around when Greenspan got Congress to raise the FICA contribution to start building up the SSTF.

But as long as SSA gets the money -- again, MY money -- back, plus credited interest, that it gave to the general fund in the first place, I will be more than happy.

How the Treasury raises this cash to repay SSA is not their concern, nor is it mine really.

American in Japan says

Under which administration did the SS budget get lumped in with the general budget? I had thought it was under the Reagan Admin…

IIRC LBJ, but the SSTF has existed since the start of SSI and has always bought government bonds with their excess FICA tax revenue. IIRC they used to be normal bonds, not nonnegotiable "special" bonds, but the special bonds do make the process of rolling them over more efficient for the SSA, plus IIRC there's some interest benefits involved.

Kevin says

bob2356 says

Kevin says

Debt that can be repaid with currency that you have the ability to print represents a tiny burden compared to debt that must be repaid with currency that you do not have the ability to print.

Troy is correct, Japan is a zero sum game. They borrowed from their citizens instead of taxing them. If America repays it’s debt to the rest of the world by printing money there will be severe consequences.

No. Japan can only repay its debts by:
- Raising taxes

- Printing money

- Cutting spending
The US can only repay its debts by:
- Raising taxes

- printing money

- Cutting spending
Who you owe the money to is irrelevant. What is relevant is how you are forced to repay it.
The vast majority of US debt is also owed to the american people. It is no different owing debt to a US citizen than it is a japanese citizen. It is slightly better to owe it to the social security trust fund or the post office, since you can default on those debts with few repercussions.

The amount of foreign held US debt was something like 29% in 2009, I don't have a current number. In Japan it's less than 1%. Depending on your perspective 71% might be considered the vast majority, but I don't consider it so. Who you owe the money to matters a lot. You are correct that no one cares how Japan or America deals with intergovermental funds. If we cut SS payments or raise the FICA ceiling the rest of the world isn't the least bit concerned.

The foreign governments and investors holding the 29% of US debt care a great deal how their portion of the debt is dealt with. I'm willing to bet they would be very unhappy with a default or serious devaluation of the dollar. If foreign investors stop buying US debt then the US government cannot operate.

bob2356 says

The foreign governments and investors holding the 29% of US debt care a great deal how their portion of the debt is dealt with. I’m willing to bet they would be very unhappy with a default or serious devaluation of the dollar. If foreign investors stop buying US debt then the US government cannot operate.

That's absurd. If foreign investors stop buying US debt, the rates will simply go up, which will make us reprioritize deficit reduction.

There is absolutely no difference to the government between some guy in Dallas buying a US bond and some guy in Beijing.

There are certain holders of US debt that you want to piss off less than others (the chinese soverign wealth fund, or the bank of japan, or goldman sachs for that matter), but even then it's not like there's any single entity that has any significant recourse other than to stop buying that debt.

I mean, I know it's fun to pretend that there's some looming threat where the chinese are going to own america, but that's about as realistic as Red Dawn.

Kevin says

I know it’s fun to pretend that there’s some looming threat where the chinese are going to own america, but that’s about as realistic as Red Dawn.

2010 Trade deficit with China: $275B (est)
2010 Total US agricultural output: $200B (est)

The Chinese could buy all the food we pull out of the ground and still have a $75B/yr surplus, not much smaller than the trade deficit with Canada ($20B) and Japan ($60B) combined.

We are exporting an immense amount of global economic power to China every year.

If we are only getting personal music players and home appliances in return, we will eventually find ourselves utterly screwed -- being outbid for the world's wealth and thus becoming a helpless nation of ex-consumers who can no longer pay their way in the world with domestic productive enterprise (or capitalist ownership of transnational enterprise).

the rates will simply go up, which will make us reprioritize deficit reduction.

Things were a bit different when the national debt was $3T in 2000.

Here's a graph demonstrating the debt inflection point we passed ca. 2001.

Red is debt public debt, green is household debt, and blue is the sum of the two.

Same graph, scaled to GDP

We're on track to having debt hitting twice our GDP, up from 1.3X of 1990-2000 (and ~0.8X of the 1970s).

So we as a nation are much more vulnerable to interest rate shocks now.

Government borrowing rates going to 5% would result in an annual government debt burden of $750B/yr, +$500B/yr more than now.

That's equal to our entire medicare expenditure, about half of our defense expenditure, ALL of welfare, or ALL of everything else (education + transportation + government + misc)

Mortgage rates rising from where they are now would utterly slaughter the housing market, taking down the patched-together banking system as it stands now, along with the GSEs and FHA/VHA with it.

I'm not entirely sure things are fixable now. The inflationistas have a case, but everyone here already knows my general opinion on that.

A decent middle-class salary in Beijing is $800/mo.

By the end of the decade this should rise to $1250/mo via the yuan strengthening from 6 to 4.

The Chinese consumer is building an immense bank of saved wealth, and the future is bright for them being able to buy things with it, things WE used to be buying.

This nation is going to shift from a consumer society to a debtor society very soon now.

Actually, that switch was thrown 15 years ago and we're just beginning to realize it now.

$44,000 is simply not a viable median American household income any more. Fixing government deficit spending is going to take 15-20% of that back. Wage equilibration with our trading partners is going to take another chunk back, how much, dunno.

This is the reality if we don't print our way to prosperity.

If we do continue to print, then I can't see what's going to happen at all, though my guess is inflation will take from the middle class what taxes didn't.

Troy says

The Chinese could buy all the food we pull out of the ground and still have a $75B/yr surplus, not much smaller than the trade deficit with Canada ($20B) and Japan ($60B) combined.

It's awesome that you think that "The Chinese" are some single entity that can act in a unilateral fashion, and the trade deficit isn't actually spread out amongst thousands of different companies (and most of that deficit comes from products being manufactured for american corporations that have outsourced it anyway)

Troy says

The Chinese consumer is building an immense bank of saved wealth, and the future is bright for them being able to buy things with it, things WE used to be buying.

Not really. The cost of steel, coal, lumber, oil, copper, etc. are exactly the same for a chinese consumer as they are for an american consumer.

Materials account for an average of about 70% of the final price of many goods. That means that the bare minimum that these products will ever sell for is about that.

If you think someone making $1250 a month is going to spend most of their salary to buy a flat screen, I don't know what to tell you.

The Chinese economy can not survive unless it continues exporting cheap goods to other countries. That is why they will continue to buy up our debt, regardless of how much we devalue it.

By the time the average chinese consumer can actually afford to buy these products (due to a combination of machines doing even more of the labor and increased salaries), the chinese export market will no longer be competitive.

The idea that wage equilibrium will ever occur is pure fantasy. If building things in China becomes too expensive, american companies will move their factories to India. If building things in India becomes to expensive, they will move their factories to Africa. If building things in Africa becomes too expensive, they will move their factories back to their home country.

Really, these kinds of exploitative labor systems have always existed and always will. The benefit is entirely of the exploiters (that includes you and me, people who buy the cheap chinese made stuff) and not to the exploited. This was true when the British were forcing spice, tea, and silk makers in India to sell their products for a fraction of their actual worth, it was true when plantation owners enslaved people to till their lands, and it's true now.

As soon as cost of shipping + cost of import duties > difference in labor costs (and probably sooner, given other barriers to doing business in china), that export machine dries up.

50 years from now, the standard of living and median household income (in PPP) in the united states will be much higher than the standard of living and median household income in China.

Yes, there probably will be more chinese households than american households making a good living (it's inevitable with so many people). That will not make American households poor as a result.

It is quite likely that the world of the future will see the complete elimination of most unskilled manufacturing jobs. Low wage jobs will continue to exist, in the form of household laborers and the like (as they always have and always will).

There's actually very little reason that China won't simply become a larger version of Japan. The rise of Japan didn't harm american standards of living, just like the rise of America didn't harm European standards of living. Zero summers constantly misjudge these changes.

Kevin says

If you think someone making $1250 a month is going to spend most of their salary to buy a flat screen

my point is that 1.2 billion people are going to be getting 33% raises this decade as the yuan moves from 6 to 4.

They will be getting 33% more stuff for their money. The TV they do buy will be 33% bigger. They'll be burning 33% more gas than they do now. They'll be going to KFC 33% more often.

Zero summers constantly misjudge these changes.

Get back to me when oil is $500/bbl.

Troy says

They will be getting 33% more stuff for their money. The TV they do buy will be 33% bigger. They’ll be burning 33% more gas than they do now. They’ll be going to KFC 33% more often

Yes, and they still won't be able to afford to buy the things that they are exporting.

Troy says

Get back to me when oil is $500/bbl.

There's a pretty good chance that it'll never happen in inflation-adjusted terms, so sure. Demand for oil in the US has peaked, and it's pretty close to peaking in China. Current trends in technology just about guarantee that demand for oil in 50 years will be less than they are today.