As economists around the globe look for nations which do not repeat Japan’s mistakes, one aspect where America stands out: debt policy.
There are multiple approaches to dealing with our nation’s debt that has reached $33 trillion, beyond simply differences among Democrats and Republicans; even intra-party politics regarding debt dynamics can be truly amazing.
Trump-friendly Republicans within the House are pressing hard for closure of the federal government, potentially prompting Moody’s Investors Service to withdraw America’s AAA credit score rating.
Unanswered questions are adding momentum to the increase in U.S. Treasury yields to 18-year record highs, while increasing confusion is helping revive bitcoin and related crypto products, which are currently enjoying a rally – another warning sign.
Washington’s rapid balance sheet expansion is driving Japan’s rapid economic expansion; politicians tinker and engage in political gamesmanship while engaging in pointless bickering over matters that matter not at all to them. If Washington implements any joint plan to reduce debt, Japan stands ready to remind Congress as well as Vice President Joe Biden’s White House that such plans cannot be sustained and therefore accelerate economic growth at an accelerated rate.
Japan has long been playing this game of debt consolidation and losing badly as Tokyo’s debt-to-GDP ratio nears 260% despite the promises made by multiple governments since the mid 1990s to do just that.
There are those who believe Tokyo has been “winning,” given its enormous debt load with yields skyrocketing. Japanese officials may not appreciate being lumped together with China, Estonia and Kuwait on Moody’s credit rating list; nonetheless, Japan remains unburdened from an all-out crisis yet.
But Japan had shown time after time that globalized economies cannot achieve financial health without bold policy adjustments.
True, America used to experience this during the 1990s when Janet Yellen served as Federal Reserve governor and President Bill Clinton was chair of the Council of Economic Advisers; and during this period the Clinton White House achieved budget balance through an agreement between itself and Congress regarding revenue and spending agreements.
Today, Yellen heads the Treasury Department at a time when America is facing a deficit of nearly $1.7 trillion for fiscal year 2023 – which represents a decrease of 1.38 trillion since 2022. We wish America luck in making strides toward solving its current budgetary situation.
Given projected primary deficits of large magnitude, demographic changes, and Federal Reserve policy that prioritizes controlling inflation, the Peter G. Peterson Foundation recently issued a report suggesting that America cannot expect to shed its debt simply by increasing GDP rapidly.
At its conclusion, the research group stated: “an all-time high for debt-to-GDP ratio should serve as a wakeup call to legislators; there are many available policy solutions designed for current fiscal and economic outlook.”
According to estimates by the Congressional Budget Office, America’s debt-to-GDP ratio will reach 98 percent by December. Peter G. Peterson Foundation forecasts suggest it could even surpass World War II levels and hit 107 percent by 2029 – setting an all-new record!
Following World War II, America managed to return to fiscal health due to an economic boom that may never reoccur in the near future.
The Federal Reserve’s rate hikes, with their rising costs and aggressive approach, are creating fiscal instability in Washington at a time of high domestic political unrest and multiple geopolitical threats on an international scale.
One major source of concern stems from the amount of U.S. securities held on Asian central bank balance sheets – Japan alone has over $1.1 trillion and China $810 billion respectively. Should investors detect any sign that Tokyo or Beijing may be selling off dollars, this could signal the collapse of global credit markets.
Indeed, the United States gains numerous advantages from having the dollar as its reserve currency. Valery Giscard D’Estaing of France famously described this privilege as an “exorbitant privilege,” permitting Washington to live beyond its means.
Future economic uncertainty could pose an existential threat to the dollar; one potential trigger could be excessive Fed tightening, leading to collapse of institutions larger than Silicon Valley Bank.
Moody’s Rating Service and S&P Global have both reduced the rating of the United States to reflect this fact, while an escalating conflict in the Middle East could elicit U.S. military intervention as another potential explanation.
These and other threats make Yellen’s job increasingly challenging every day. Investors’ trust in Washington is under constant strain as debt has grown significantly since S&P reduced its rating on Washington in 2011. Now U.S. debt stands 56% higher.
If Yellen and her team are working on a strategy to reduce America’s debt–either through budget cuts or tax hikes–it might be wise for them to make this plan official, as this could signal future policy shifts should bitcoin continue its upward trajectory due to fears associated with an imminent debt repayment scenario.
To illustrate why bold action are necessary, just consider Japan, where debt continues to balloon and take on an identity of its own.