Saturday, January 5, 2013

Japan and the US Debt Ceiling

Der Spiegel ran an interesting article on Japan and the fact that it has sovereign debt outstanding equal to 230% of GDP and near zero interest rates.  The article completely undermines the call to not raise the US debt ceiling unless there are spending cuts.

Underlying the call to not raise the debt ceiling and to adopt austerity in the form of spending cuts is the notion that at a ratio of 90% debt to GDP the US will go over some cliff from which it can never recover.

This argument reminds me of the Road Runner cartoon with Wily E. Coyote.  During the cartoon, the coyote would run off a cliff and be suspended in mid-air before the coyote would recognize he was suspended in mid-air and would plummet to the ground.

The reason I bring up this cartoon is that Japan appears to be the coyote.  Apparently, it ran off the cliff almost 2 decades ago when it passed the 90% debt to GDP ratio.  It has continued on in mid-air and has reached 230% debt to GDP without plummeting to the ground without seeing interest rates on its debt head for triple digits.

Hedge fund operators like Kyle Bass see this and say Japan bonds represents a better short than sub-prime securities.

However, the fact that Japan's interest rates have not risen and its economy has not yet experienced inflation, let alone hyper-inflation, suggests that there is some combination of factors that supports the ongoing increase in Japan's sovereign debt outstanding.

I would be interested in hearing from readers what they think these factors might be and is there any reason to think that the US won't also benefit from these factors.

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