The Economist reminds us once again why the U.S. government’s deficit might not be as large a problem as some make it out to be.
Essentially, a country’s long-term debt growth is driven much more by demographic change and rising entitlement costs, than by short-term deficits used to kick-start an economy.
They also argue that markets right now don’t even care about long-term debt problems, despite what many believe, using Japan as an extreme example.
Thus recent U.S. deficit concerns are overblown, according to The Economist.
The Economist: Which is to say, people who are actually concerned about growing public debt should pay very little attention to what the government is currently doing to alleviate the pain of recession, and much more attention to how the government will address revenue shortfalls 10 and 20 years down the road.
Japanese public debt is, as you can see at right, quite a bit larger relative to GDP than is the case in America and Britain. What’s more, the demographic picture in Japan is more troubling than it is in America. And yet, markets don’t seem all that bothered by the country’s debtload.
It’s worth noticing what that 6-week high yield on 10-year bonds is: namely, 1.36%. That’s actually the lowest interest rate being paid by any advanced economy, two percentage points lower than Germany’s rate. If investors fear a default or a destabilizing collapse in the yen, that fear certainly isn’t reflected in Japan’s borrowing costs.
U.S. treasury yields are pretty low as well and don’t seem bothered.