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Oct 22 2009, 3:56 pm by Megan McArdle
Tokyo's new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.
"Public sector finances are spinning out of control -- fast," said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. "We believe a fiscal crisis is imminent."
One of the lessons of Japan's experience is that a government saddled with debt can quickly run out of room to maneuver.
"Japan will keep on selling more bonds this year and next, but that won't work in three to five years," said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. "If you ask me what Japan can resort to after that, my answer would be 'not very much.' "
How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.
The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.
The spending initially fueled Japan's rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.
Still, officials insist that Japan is better off than the United States by some measures.
One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America's debt is held overseas by countries such as China and Japan.
Moreover, half of Japan's government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.
"The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."
I totally agree that the White House should be borrowing a lot of money this year. But we're getting to the point where we need to start hearing about how we're going to close these gaps. Much has been made of Obama's fiscal responsibility, based on his promise that the health care bill will not add one dime to the deficit. Well, here are our projected deficits, with and without the health care bill
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