Japan and the US are both facing potential problems from mounting debt. However, there are considerable differences in the nature and consequence of their respective liabilities.
In the first instance, having high liabilities is not necessarily a bad thing. When used efficiently, debt can increase productivity and boost long-term economic growth. One determinant of the prudent use of borrowed funds is whether the money is used for investment or consumption expenditures, as in the fable of the grasshopper and the ant. Another issue relating to efficiency concerns whether spending decisions are politically-motivated or based upon market impulses.
The US' perpetual government deficits and rising public-sector debt has disappeared yet private sector debt is rising rapidly. Japan's experience is just the opposite with an exceptionally high rate of private savings and exploding public debt. The rate of private saving in the US is now at its lowest level since the beginning of the 1930s and household debts are at their recorded highest levels. Yet most economists have acknowledged that rising productivity is promoting the ongoing boom. Japan's increasing debt comes from public-sector deficit spending that added new debt of nearly ?120 trillion (over US$1 trillion) since 1992 when the government began introducing fiscal stimulus to kick-start its economy. Japanese government debt could reach as high as 150 percent of GDP by the end of this year. However, Vice President of Goldman Sachs Asia, Kenneth Courtis, suggested if all the public sector commitments and guarantees of the state (for examples, pensions and restructuring costs of the banking system) the debt-to-GDP ratio would rise to between 270 and 330 percent. Even with all this spending, Japan's economy continues to have trouble recording positive growth.
Private sector domestic debt in the US rose by 6.5 percent in 1999. Much of this debt can lead to improved productivity because the bulk was incurred by businesses to invest in new plants and equipment and most new bank lending has financed corporate merger activities. In all events, current income levels of households and businesses allow them to carry the debt service costs of interest payments and repayment of the loan principal. The public sector component of total debt is falling due to surpluses that have reduced the need to issue new debt.
The most notable risk of America's high private sector debt is from a slowdown in overall economic growth. This might lead to a large burden of bankruptcies leading to delinquent loans or even defaults. Yet this would only be a problem if the banking system were unable to sustain the needed level of liquidity for the system.
In terms of ability to rollover problem debts, the US banking system is currently very well capitalized. At the same time, lending standards for consumption were raised after America's S&L crisis of the late 1980s.
Meanwhile, the ratio of stockmarket capitalization to GDP has risen from a 60-year moving average of 49 percent to 150 percent. This has been driven by increases in the number of shareholders. About 48 percent of US citizens have equity holding of their own or through pension plans. In the 1950s, less than 5 percent of Americans held equities in any form. Now in Australia, nearly 54 percent of the adult population are shareholders. In Canada and the UK share ownership is 52 percent and 40 percent of the population, respectively.
Higher private debt in the US has also provided small and medium-sized companies with startup capital in the stockmarket to support dynamic growth strategies. For example, initial public offerings (IPOs) have generated US$350.8 billion in funding since 1989. These funds have also allowed more investment spending and expenditures on R&D. Business investment contributed nearly one-third of the economy's growth since 1990, and R&D now accounts for 2.7 percent of GDP, up from 2.4 percent during the mid-1990s.
In the US case, its burden of debt will be paid by private individuals or businesses that chose to incur it and who have used it (mostly) wisely to enhance their productive capacities so they are better able to repay their debts. The composition of Japan's ballooning debt is such that future generations will be saddled with a high tax liability to pay interest and principle for money that was spent and little beneficial effect upon economic growth.
One irony is that lending by the high-saving Japanese is fueling America's borrowing binge. Another is that America's boom and Japan's gloom provides some evidence that rapacious consumers and profit-seeking businesses are better able to provide improved material well-being of citizens than are bureaucrats and politicians.
Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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