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My understanding is that Japan has a debt-to-gdp ratio of approximately 200%. It is considered to be one of the worst in the world.

The United States is only in the 100% range. What effects would be noticed in the economy and government of the United States if it were to creep into Japanese level styles? Is the "lost decade" (actually two) of Japan a consequence of this, or just merely a correlation?

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    I fixed your question. US Debt2GDP is 100% (src ), not "50% range" – user4012 Jan 11 '13 at 19:26
  • Wow, I was out of date. Thank you for the update! – Affable Geek Jan 11 '13 at 19:50
  • Think in terms of repayments rather than debt. Debt requires interest repayments. If interest rates are low the repayments on even large debts can be perfectly manageable. So the government needs to keep repayments low by keeping interest rates low. They do this by buying their own debt with money printed by the central bank. This increases inflation. The government can increase inflation by spending more, and decrease it by spending less. So, the question ultimately boils down to how much money the government can spend before inflation becomes a problem. – Matt Thompson Jul 27 '17 at 3:22
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Japan's sovereign debt was 65% of GDP in 1992 (the Lost Decade started in 1991). The rise to 200% was the consequences of trying to dig themselves out of the hole, not the cause of the lost decade.

It would take a book (and did :) to list the reasons for the lost decade, but on a fundamental level, a large (not the only) part of the problem is the demographic bomb - Japan just didn't make enough children to produce in the economy as older workers retired and lived longer. Because of that, they could not achieve the economic growth needed to plug the deficit. Additional reasons are high savings rate (people kept buying government bond to save), middle-of-the-way monetary policy (which IIRC precipitated the infamous "Helicopter" Ben Bernanke speech giving him his nickname), and consequences of 1980s asset bubble.

A good article covering the Lost Decade is http://ezinearticles.com/?National-Debt-History&id=2854873 by Martin Gremm

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    Yet it doesn't seem like it plunged them into poverty... – gerrit Jan 11 '13 at 21:03
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    @gerrit: you can't compare social policies in Japan and the USA. The cultures are very different. In Japan, FAMILY is extremely important. The children take care of their aged parents. Thus, aged parents are able to stay out of poverty without government assistance; as the salaries their children are earning can keep up with inflation. It won't work in america because most elderly have to look after their own finances. The kids feel little to no responsibility. Inflation caused by 200% debt/GDP ratio would force most elderly people to eating dog food to survive. – Dunk Jan 13 '13 at 18:26
  • It's more like a lost bi-decade (or quarter century lost) except this year seems to be a golden year so far (fingers crossed). – user1840 Jun 21 '13 at 6:26
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In the discussion of debt one needs to distinguish between gross debt and net debt. It's the net debt that matters generally. The same applies to income. It's your net take home you use to pay your bills.

Japan has large gross debt but significantly less net debt. That's because they are the second largest holder of US bonds after China. http://en.wikipedia.org/wiki/File:Us-china-trade-data-foreign-holdings-treasury-securities-2000-2010.jpg

When you factor in Japan's assets you see that their net debt is about 140% even though the gross debt is over 210% (in 2012). http://www.economywatch.com/economic-statistics/economic-indicators/General_Government_Net_Debt_Percentage_GDP/

Another important factor is interest rates and who owns the debt. The Japanese people own must of the government debt which means when they are paid back much of it will be reinvested/spent in Japan. Additionally, the interests rates are very low. Japan is in a much better position than Greece.

The largest holder of US debt is incidentally the US. The net debt is much lower than gross debt. We often hear about how much interest the US has to pay but what's not often pointed out is that a lot of that interest goes back to itself since it owns around 50% of its debt. http://en.wikipedia.org/wiki/File:Estimated_ownership_of_treasury_securities_by_year.gif

When the US loaned the UK money during the Marshall plan the UK reinvested it at higher interest and paid the US back over time making a profit. People have done the same thing with student loans. One could argue that it's in the US's interest to acquire more debt now with rates low and reinvest the debt and make a profit in the future.

The US like Japan is in a much better position than Greece and more debt does not necessarily push it closer to Greece. So to answer your question its difficult to say what happens to the US with some arbitrary debt/GDP ratio. That number alone is rather useless to make any predictions except that politicians will continue to use it to try and win elections.

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  • "over 2010%"? Think you meant to write either 200% or 210%. Otherwise, good answer +1 – Eugene Seidel Jun 21 '13 at 6:04
  • That economywatch page is neat. "Total Government Net Debt (% of GDP) for Norway in year 2013 is -175.009 %". Parents, make sure your child marries a Norwegian! – Eugene Seidel Jun 21 '13 at 6:29
  • Norway is a very good example. They have positive gross debt and negative net debt. It would be stupid to judge Norway based on its gross debt. They have the world's largest sovereign wealth fund - it would be foolish to ignore that. – user1840 Jun 21 '13 at 6:32
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Additional notice to the debt to GDP ratio:

this ratio is showing nothing if we don't see through the whole picture. Let's assume that country A is in debt, and the gdp-debt ratio is 100%, and their central bank gives 6% on bonds. Take then country B which has 200% debt to the gdp, but their central bank gives 1% on bonds. Of course this will be a serious simplification, but it will be easy to see the point. Country A pays 6% of it's annual income to keep the debt ratio. Country B pays 2% of annual income to keep up the level. It is easy to say in this simple system that Country A is in worse situation than Country B. What is the catch? If the loan interests are changing, for example if the credit of the country changes, and the lenders don't trust in country B, a smaller amount of percentage raise effects double than country A.

Effects of high debt:

There are two major cases of debts: own currency debt and foreign currency debt. This second one is way worse. If a country can't pay their debts, they have a choice to devaluate it's currency and cause artificial inflation to handle the debt level. Whoever owns that country's debt gets the short end, they receive the partial money they lended to the country. In case if a country has the debt in foreign currency, that means that country can't operate with devaluation tool. The only working way in this case to simply refuse to pay. That is called bankrupcy. Both cases can lead to hyperinflation.

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A very big danger with a high debt (gross debt, using the terminology here), is the size of the interest payments. A very high debt, coupled with normal interest rates (or abnormally high interest rates (think early 1980s)) means very high debt repayment costs. The US has been lucky in the past 10 years or that interest rates have been well below what would be considered normal in an historical context. As a result, debt service costs have not (yet) ballooned.

When debt service overwhelms every other budget item, the government loses the flexibility it needs to, for example, cope with an economic downturn.

Canada faced a debt crisis in the mid-1990s. Their abnormally high debt (72% debt-to-GDP) sparked a credit downgrade by the ratings agencies (Moody's, S&P, ...). This sparked a round of severe belt-tightening - a combination of drastic spending cuts coupled with tax increases. Canada is much better fiscal shape as a result. It was comfortably able to deal with the 2008 recession (which was also less severe in Canada than the US).

People in the US forget that the US was running a surplus at the end of the 1990s. It turns out if you simultaneously cut taxes and start a couple of wars, a surplus will quickly turn into a deficit and the debt will increase.

At some point, the path that the US is taking (for example, cutting taxes while the economy is doing well), will get the country to a point similar to where Canada got to in the 1990s.

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