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Sustainability of Public Debt in the United States and Japan
Report

Sustainability of Public Debt in the United States and Japan


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Editorial Rating

7

Qualities

  • Innovative

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.

Take-Aways

  • Sovereign debt is sustainable when its size, relative to GDP, remains stable or declines over time. But changes in growth and interest rates in the long run ultimately determine a nation’s fiscal viability.
  • Current thinking posits a stable fiscal situation in the United States until about 2024. But mandatory spending on health care will grow relative to output during that period.
  • Japan’s extremely high nominal debt levels are currently relatively benign for four reasons: low interest rates, a “home bias,” sizable government assets and Japan’s ability to issue its own currency to support its borrowings.

About the Author

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