Thursday, July 21, 2011


I spent an hour googling for statistics on total debt in Japan. Found two potentially useful sites: The Statistics Bureau, and The Bank of Japan. But no useful information until I got to Thought Offerings: The Mystery of Japan's Private Debt Levels (Solved?)

Right off the bat, Thought Offerings' host hbl offers a graph showing "Japan's Total Debt Levels by Sector (1980-2007)". Total debt, plus a breakdown into broad categories. Of this chart, hbl writes:

The above chart shows the total debt in yen for Japan's household, corporate, financial, and government sectors from 1980 to 2007 (the latest available). Private sector debt actually kept rising (much more slowly) after 1990, peaking around 1997! Government debt also rose significantly during this time period.

Two remarks on that excerpt. First, hbl breaks debt down the way I do: private sector debt and government debt. (And the highlighting is hbl's, not mine.)

Second, Japan's economy got into trouble around 1990, but private sector debt continued to grow for almost a decade after that. If (as I think) private sector debt is the problem, then the problem continued to get worse for a decade after it became obvious. There is a lesson in this for U.S. policymakers: If we expand government debt in order to rescue the economy, we will continue to make the problem worse unless we take specific actions to reduce private-sector debt as part of the rescue plan.

As a follow-up to that second remark, hbl again:

... willingness to provide ongoing fiscal stimulus as Japan did ... makes the Japanese style stagnation and mild deflation relatively more likely in the US

More likely than a deep depression, hbl says. But surely, purposeful expansion of the government debt does not solve the problem. What we need instead is purposeful reduction of private debt. Because excessive private debt is the problem.

I hope you can see, in the above, my respect for the work hbl has done in the post. I find a lot of insight in the post, and a lot to agree with. Now I'm going to go the other way and point out what I see as the major flaw.

I do agree with this: "Of course, total debt-to-GDP is not the only macroeconomic determinant that matters..." But these are the "other factors" that hbl identifies:

  • Substantially higher household debt (in the U.S.)
  • The global context today, and
  • Other differences in financial markets today

Hbl follows that analysis with this insight:

Many people summarize the options for removing excessive debt as inflate or default.

The options for removing excessive debt. That is what needs to be done. That must be the primary focus. Nothing else will solve the problem. hbl knows it, but has difficulty maintaining focus. hbl's concerns include household debt, and the global context, and financial markets. A piece of the problem, a result of the problem, and a vehicle delivering the problem.

But where is the focus on "removing excessive debt"?

And where is the "macro-economic determinant that matters"? Where is the analysis of the relation between private debt and government debt? Where is the debt-relative? Everyone focuses on government debt and if they ever compare it to anything, they compare it to GDP. Allow me to summarize the evidence hbl presents for Japan:

  • The graph of total debt levels by sector
  • A graph of Japan's GDP.
  • A graph of the debt-to-GDP ratio by sector
  • Another graph of public and private debt as a percent of GDP
  • A comparison to U.S. debt-to-GDP by sector
  • A bar graph of debt-to-GDP ratios
  • A table of percentages related to the bar graph

Of those seven items, one shows debt, one shows GDP, and five show debt-to-GDP. And yet, as hbl says, debt-to-GDP is not the only macroeconomic determinant that matters. So where is the debt-relative?

hbl "breaks debt down the way I do: private sector debt and government debt." But hbl doesn't use his own breakdown. He doesn't compare the one to the other in his graphs. He doesn't show private debt relative to government debt.

I want to see some graphs comparing private debt to government debt in Japan. That is what's missing from hbl's post.

Where is the debt-relative?


Clonal said...

Art you might find Richard Koo's ideas on a "balance sheet" recession useful.

His 2010 presentation to INET

If you are into watching videos, here is Richard Koo at the INET

According to Koo,

the reason is that we are in a "Balance Sheet Recession," a very rare situation in the wake of bubbles that leave businesses and individuals underwater so they spend all available income paying down debt and do not invest for new growth.

Koo argues that this is almost exactly what happened in Japan after the collapse of their bubble economy in 1990, and that country spent 15 years of trial and error policies before they finally got back to private sector growth. The only thing that solved the problem was massive and sustained government investment to fill the void left by the private sector. Monetary policy did not work since businesses could not be lured back to invest with lower interest rates.

Jazzbumpa said...

If you've explained why the ratio of private debt to public debt is important I've missed it. Please point me to this.

I will submit to you that debt, per se, is not THE problem. EXCESSIVE debt is A problem, but also a resultant, not the underlying root cause.

Debt is a symptom, and by going after debt you are only attempting to treating a symptom. Fail to solve the underlying problem(s), and you might kick the can down the road for a while, but in time you'll get a new set of symptoms. Unlike the human body, the economy will not heal itself.

You also imply (or at least I infer) a common misunderstanding about (Keynesian) government debt. It, per se, is not a solution. Spending is. The deficit is a byproduct, no a goal - which is part of the reason why cutting taxes doesn't accomplish anything - at least not anything good at current tax rates. Deficit spending, per Keynes, is used to stimulate demand under a certain set of conditions - specifically during a liquidity crunch at the lower interest boundary. Jump start demand and the economy can recover. Then deficits are no longer necessary or advisable.

Hence, fiddling with a debt ratio is whistling in the wind.


The Arthurian said...

I have the blog set up so I receive comments as email and, you know, it sure makes the workday more interesting when there are comments :)

Clonal, in comments here, Jim also has recommended Richard Koo... Koo's getting a lot of thumbs up. Maybe this weekend I'll check it out. Thanks.

Jazz, as far as why the ratio is important, it is quite definitely tied to economic performance. Perhaps my Everything You Need to Know About Economic Performance will give you the big picture. The more recent Rise and Fall provides a close-up of the good years of the 1990s and how I think we got there. (Plus you can see it in my DPD graphs!)

I agree debt is a symptom. We probably disagree a bit on why we have so much debt. But I don't think you see me disagreeing much with changes you want to make.

As to why I think we have so much debt, use my "first visit" button and see the two posts on "policy Venn".

eh, back to work.

The Arthurian said...

"You also imply (or at least I infer) a common misunderstanding about (Keynesian) government debt. It, per se, is not a solution. Spending is. The deficit is a byproduct..."

Give me a minute to work this out here. You are referring to government stimulus spending (as opposed to deficits) as a (Keynesian) way to extricate ourselves from the problem we have been in since the crisis.

Since the crisis.

I am talking about long-term trends in monetary balances, as a cause of the crisis.

A cause of the crisis.

Before, and after.

The Arthurian said...

Another one that shows why the private/public debt ratio is important in my view:

Public v Private (4)