Tuesday, Jun 09, 2009
Same problem in the UK
Reuters: Japan's lack of debt plan seen pushing up rates
Japanese government in a bind, should the economy recover their debt servicing costs will rise to an unaffordable level. At the same time, the economy faces increasing unemployment, an increasing deficit, and higher costs for pensions. Essentially government borrowing has hit/gone beyond the limit of affordability, and the sustainability of government finances in a perverse way depends on the economy staying in the doldrums to avoid a fairly immediate payments crisis. This is the situation we will eventually run into in the UK so worthwhile keeping an eye on events. The government have the advantage of a fairly low tax regime which can be raised considerably, low VAT/income tax etc, which we in the UK don't have as an option.
Posted by stillthinking @ 12:09 PM (439 views) Add Comment
2 Comments
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1. paul said...
Just to make a side point, in the earliest stages of the deflation, Japan's economy also appeared to make a temporary recovery on the back of the huge quantities of borrowed money expaning the PSBR, only for the decline to continue later when the transmission mechanism failed (in other words borrowers' appetite for debt had faded).
No-one has yet come up with a convincing argument why the UK will not (and so far has not) experienced a very similar decline - which will in all likelihood be more prolonged and severe for the UK.
2. uncle tom said...
It is not such a terrible issue for a government to have a very high level of public debt, if that debt is widely owned by the citizens and pension funds of the same nation. The interest paid by the government will ultimately be mostly spent within the borders of that country, boosting the economy, reducing welfare liabilities, and a lot of it will eventually return to the coffers via taxation.
In Japan's case, it appears that much of their sovereign debt is indeed domestically owned, and they also hold very large foreign currency reserves.
The issue for them now is to stop the debt burden growing at a pace that exceeds domestic savings growth, and to recognise the benefits of trade equilibrium.
I'm not sure that the economic challenges they have to address now are quite as insuperable as many portray. They have taken plenty of pain over the last couple of decades, and should be able to navigate toward a position of affluent stability now.