Japan's Debt Problem Visualized

Japan's debt problem visualized at the end of 2012 Japan's central government was 997 trillion yen in debt that's more than 200% of GDP and more than $80,000 per capita there's little chance of it ever being paid back and unfortunately things are about to get a whole lot worse in order to understand why let's look at how the government accumulates debt in the first place each year the government receives money from households and corporations in the form of taxes and other revenues it then spends that money in the economy on public services and other commitments if the government wants to spend more money than its revenues it has to borrow the difference it does this by issuing debt securities io u--'s investors buy them the government gets the money it needs and investors receive interest but when the outstanding debt gets too large investors start to worry that they won't get their money back this is where the central bank comes in the central bank lowers interest rates which basically means that it prints money until interest rates hit its target satisfied that their investments are safe investors keep buying government IOUs which means that the government gets to keep spending more than a turns sounds great right well as a catch overtime continual interest rate suppression and money printing sets up an inescapable trap here's how it works imagine the government's outstanding debt is a big box of fixed-height then each year it has to pay a small slice of the box in interest you can think of this as a trade that it has to fill with incoming funds in normal circumstances tax revenues fill the interest expense tray and go a long way towards funding other expenditures then investors fund what's left now when the central bank lowers interest rates the tray becomes shallower this makes it easier for the government to fill the tray with its core revenue stream allowing it to grow its other expenditures over time the interest expense tray gets shallower and wider and expenditures grow substantially now even a small increase in the average debt cost the height of the tray increases the interest expense to the extent that it takes up all of the tax revenue [Music] and when it does the government has to borrow everything it spends this only widens the interest expense tray [Music] investors catch on and sell their bonds raising interest rates further and soon enough the government finds that its core revenue stream meets only a fraction of its interest liability even the printing press can't help now if the central bank tries to grow tax revenues investors sell their bonds to account for inflation this pushes up average debt costs such that the total interest expense rises faster than tax revenues so in the end the situation remains the same and the government inevitably defaults so here's where Japan fits into this framework at the end of the 2012 fiscal year Japan's debt was 23 times revenues so let's look at this in terms of our tray analogy this means that a 1% increase in the average debt cost increases the overall interest expense by 23% of tax revenues now 23% of tax revenues are already being spent on interest each year so the average debt cost is only about 3% away from the point at which interest consumes the entire tax revenue so it all comes down to this can the government keep its debt cost from rising to 4% well in order to answer this question it's important to distinguish between Japanese investors and foreign investors let's start with Japanese investors the last 20 years have been very challenging for them since almost all prices have been going down the exception has been government bonds so as you can imagine a large part of local investable funds are already invested in them this means that new investable funds would have to buy the government's new bonds since investors represent households and corporations these new funds would have to come from their new savings the problem is that new savings are declining the population is aging so households are more likely to draw down upon savings than create them and the balance of trade is deteriorating making it difficult for corporations to generate profits basically the new savings of households and corporations are less than what the government needs to borrow so the only option is for foreign investors to get involved but they're used to receiving higher rates of return so as external investors fund more and more of the government's deficit the average debt cost may well rise to the critical level of 4% but it gets worse the Bank of Japan recently started targeting 2% inflation the problem with this is that Japanese investors had come to view falling consumer prices a deflation as real return so when consumer prices fell by 1 percent per year and they got a nominal yield of 1 percent they called it a 2 percent real yield but the Bank of Japan's new policy is going to flip the polarity of this calculation so even get back to where they were investors will have to charge the government a nominal rate of 4% combine this with Japan's increasing reliance on external capital and you can see just how easily the average debt cost could breach the critical level of 4% and once that happens it's game over [Music]

Channel: Addogram

Views: 2,888,735

Rating: 4.5877519 out of 5

Keywords: Japan Debt Crisis, Financial Crisis, Japan Debt Problem, Japan, debt crisis

Id: Njp8bKpi-vg

Length: 6min 46sec (406 seconds)

Published: Thu Apr 04 2013

Reddit Comments

[u/Err_Eek]

Nice graphics, but I still don't understand what's going on

[u/gtk]

That was terrible. It was a general explanation of how the American economy works with the concepts applied to Japan. It ignored all of the factors that are specific to Japan.

[u/joblesspirate]

What software do they use to make these presentations?

[u/DirtPile]

I had to throw away my computer after watching that.