If you try to argue that the US debt “crisis” is overblown by comparing us to Japan, inevitably you’ll get a response like: Well, the Japanese save a lot more, and can fund their own deficits.But actually, this isn’t a very good rebuttal. The extent to which the US owes its debt to foreigners is overblown, as this chart shows. And besides, as Richard Koo points out, US savings and US government deficits line up pretty nicely.
There is a difference though between the US and Japan, and it’s pretty significant.
See Japan has had tons of downgrades over the past decade — people screaming about how the government is broke and whatnot. And yet every time, those warnings have been ignored. And you know what? Rather than a crisis happening, yields on Japanese debt grind lower and lower. Basically, the Japan story is a gigantic vindication of Richard Koo, and a giant slap in the face to the ratings agencies.
That Japan hasn’t had an internal political freakout over spending goes nicely along with what people observed after the big earthquake, that there was no looting. Simply put, Japan is far more collectivist, naturally, than the US is. Of course, the other side of this strong collectivism is a strong xenophobia, and harsh stance toward immigration.
In the US we’re exactly the opposite. Ron Brownstein has written about the divergent priorities between different demographics — the gap between the grey (old whites) and the brown (younger Hispanics). Even Brownstein, by honing in on the racial aspect of entitlement spending, is probably guilty of ignoring some un-PC aspects of the debate, namely the fact that it’s not Hispanics who are leading the charge to eliminate Medicare.
Regardless of who’s pushing to defund what, you can see that the politics of spending is already posing huge systemic risk, merely by the fact that some politicians and analysts are actually calling for ths US to not raise the debt ceiling, which could potentially threaten default. Is that clear? It’s not the market posing a risk, it’s simply the divides in the US being exposed with the “debt” being used an excuse.
The bottom line: Japan has ignored the doubters and have been fine. The US is not ignoring the doubters, and is thus potentially on the verge of taking actions that would be wildly disruptive.
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