Japan's National Debt Hits Record High

Associated Press via Yahoo ^ | 09/23/2005 | AP via Yahoo

[TheJapaneseDream]

Tale of Two Debts/Deficits: Japan and the U.S. (October 9, 2006) by Charles Hugh Smith

The not-so-visible difference between Japan’s debt and the U.S. debt is that the Japanese are prodigious savers, and can fund their own debt internally. In other words, as long as the Japanese save 20% of their national income, then their individuals, insurance companies and banks can buy their government’s 34 trillion yen in bonds and cover the annual deficit more or less indefinitely.

But here in the U.S. we are saving -1% —yes, a negative savings rate for the first time since the Great Depression. We don’t generate sufficient savings to fund our own government’s deficits. We rely on foreigners to buy at least half of all outstanding Treasury bonds— over $2 trillion, not counting OPEC money which flows in from London or the Caribbean and thus isn’t counted as central bank ownership.

Bottom line: the Japanese can continue running such staggering deficits because they can fund them with their own savings. The U.S. does not have that luxury. So what happens if for political or financial reasons, foreign investors and central banks stop buying U.S. bonds? Interest rates will have to rise to the point that someone steps up and willingly slaps down their cash for a fixed rate of return from the U.S. Treasury.