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Sustainability of Public Debt in the United States and Japan
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Sustainability of Public Debt in the United States and Japan

William R. Cline
Peterson Institute for International Economics, 2014
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7

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Recommendation

In 2000, economists and policy makers in the United States pondered how the capital markets would adjust to endless budgetary surpluses wiping out the supply of risk-free US government bonds. But in short order, that problem became moot as surpluses gave way to rising deficits. Japan, on the other hand, has long endured “seemingly stratospheric” debt levels. Economist William R. Cline applies his sovereign debt model to the United States and to Japan to gauge how well and how long each country can maintain its fiscal stamina. getAbstract recommends his cogent outline of likely near-term developments and their impacts on American and Japanese sovereign debt levels.

Summary

Sovereign debt is sustainable when its size, relative to GDP, remains stable or declines over time. While a country may be able to service high levels of debt due to currently low borrowing costs, changes in growth and interest rates in the long run ultimately determine a nation’s fiscal viability.

Current thinking posits a stable American fiscal situation until about 2024, due to the 2011 sequestration process, which placed limits on all US discretionary spending, and a follow-up 2012 budget agreement. In Japan, consensus holds that the country’s extremely high nominal...

About the Author

William R. Cline is a senior fellow at the Peterson Institute for International Economics.

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