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Trashing Japan to Push Deficit Reduction
Most of the elite definitely want the public to be scared about the deficit. They are constantly filling the newspapers and airwaves with the horrors of the huge debt. (Never mind that the reason we are running up huge deficits is entirely because these elites were too incompetent to see an $8 trillion housing bubble.)
The elites want to cut Medicare and Social Security. They also want a national sales tax. These measures will lead to serious declines in the living standards for middle class people, a group that has seen its wages stagnate for the last three decades.
Everything goes to push the anti-deficit agenda, including just making things up. In this category, the NYT has an article today telling readers how Japan is strangling under its enormous debt burden. At one point the article tells readers that: "Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget."
That would be news for the folks in Japan. They think that they only spend 11.2 percent of their budget on interest (page 4). (The interest burden peak in the U.S. at 16 percent in 1991.)
The article is full of shrill warnings about the dangers of Japan's deficit, but it includes almost no facts to support these warnings. For example, it quotes Carl Weinberg, chief economist at High Frequency Economics: "public sector finances are spinning out of control — fast,... We believe a fiscal crisis is imminent.”
The article tells readers that: "The fall in public and private savings could eventually reverse Japan’s current account surplus, possibly driving up interest rates as the public and private sectors compete for funds. Higher interest rates would increase the cost of servicing the debt, and raise Japan’s risk of default."
It continues: "In a worst case, Japan’s currency could suffer as more investors switch away from Japan to other assets. And if Japan were to print more money and set off inflation to reduce its debt burden, the supply of yen would shoot up, lowering the currency’s value further."
Of course the markets refuse to be as worried about Japan's collapse as the NYT wants them to be. The people who actually are putting their money on the line are willing to hold 10-year bonds issued by the Japanese government at interest rates just over 1.0 percent. As the article notes, the yen has been rising, not falling. And, Japan's main concern for over a decade has been deflation (price are again falling in Japan), not inflation.
The article even raises the terrifying prospect that Japan's current account surplus will turn into a deficit as its population ages. Actually, this is what would be expected. That was the point of running a current account surplus. This surplus allowed Japan to build up a huge supply of foreign assets that it can draw upon as its population ages.
In short, there is no story here. The NYT apparently doesn't want the U.S. to run deficits and it is prepared to fabricate stories about Japan to help push its agenda for the U.S.
--Dean Baker
COMMENTS (12)
"The elites want to cut Medicare...". True, and Medicare's future is tied into the health care system's future.
The NYT doesn't seem to be the objective liberal sanctum that it's sometimes portrayed as. Along with this editorializing about the deficit, its coverage of health care reform has been atrocious. About a week ago (right after the AHIP report had been made public), the NYT ran a story about Congress's "legislation" failing to control health care costs. By "legislation" they were talking about the Baucus bill. That's right -- the only one (of five in the entire Congress) that doesn't include a public option, the main factor that's supposed to hold down costs. The NYT featured a ~500 word story about "controlling costs" that didn't even mention a public option *once*.
Here's the very misleading article: http://query.nytimes.com/gst/fullpage.html?res=9402E0DF163BF931A25753C1A96F9C8B63
Posted by: zach | October 21, 2009 2:14 AM
Some home-brewed IMF therapy for the U.S. middle class.
Posted by: purple | October 21, 2009 2:48 AM
I'm not understanding why the elite want the US public to fear large deficits. Could somebody very briefly explain the reasoning behind this?
Posted by: Ryan Dudgeon | October 21, 2009 8:42 AM
NYT's economic reporting is mostly propaganda. It is hard to tell whether this serves any strategic purpose on behalf of the plutocracy or whether it mostly betrays longstanding dogmatic rigidity. The frequent made-up stories about how bad Japan is doing must have some psychological purpose. The NYT clearly doesn't want to face the dire situation at home and so clings to the illusion that the old rivals are even worse off.
Posted by: piglet | October 21, 2009 10:05 AM
Two things. First, it looks as if the reporter has made an error in confusing the total expenditures for debt service as a percentage with the percentage related to merely paying interest. It's not clear to me how significant this difference is, and Google isn't being entirely helpful, but it doesn't look as if he's simply making stuff up.
Second, it's always strange that people who insist inflation is around the corner seem to disregard the signals the markets are sending but only in this area. Why the market prices everything else well, but not this, isn't obvious to me. Maybe because I'm not an expert, I'm missing something obvious, but people like Dean and Paul Krugman have been making this point for a while: the dire predictions regarding interest rates and inflation simply aren't reflected in the market.
Posted by: Brian J | October 21, 2009 10:54 AM
You shouldn't calculate interest service as a % of the budget when the budget includes a huge amount of debt issuance. It should be caculated on tax revenue, in which case you get 16.2%. Also, pointing to current interest rates of only 1% as proof that there is no problem is circular reasoning. Subprime bonds were trading at par until they weren't.
Posted by: Andrew | October 21, 2009 12:53 PM
The difference between Interest and Debt service as a percentage of Japanese Government expenditures is captured in this equation:
National Debt Service(24.3)% = Interest(11.2%) + Debt reduction(13.1%)
You do have to pay the principal of debt at maturity. But that is not the same as the interest burden alone.
Perhaps the difference was lost in translation.
Be careful if you are planning trips to the Washington Monument:
http://www.businessweek.com/investor/content/oct2009/pi20091012_141907.htm
Posted by: AndrewDover | October 21, 2009 1:15 PM
Dean and Brian J,
The markets didn't seem all that worried about the housing bubble either. I wouldn't trust market sentiment on Japanese debt. It is going to cause some trouble, though not as much as the debts of nations that are more dependent on foreign lenders.
Andrew has good points on the relevance of actual revenue and subprime complacency.
Posted by: RR | October 21, 2009 2:45 PM
Notice that http://www.themalaysianinsider.com/index.php/business/40981-rising-debt-a-threat-to-japanese-economy- is very similar it is to the New York Times piece.
Posted by: Anonymous | October 22, 2009 1:37 PM
"National Debt Service(24.3)% = Interest(11.2%) + Debt reduction(13.1%)"
Sources please?
Posted by: piglet | October 22, 2009 5:03 PM
The source was Dean's reference: http://www.mof.go.jp/english/budget/pamphlet/cjfc2008.pdf
Search for "debt redemption"
and look at the chart on the page numbered 1.
Posted by: AndrewDover | October 25, 2009 3:02 PM
"The people who actually are putting their money on the line are willing to hold 10-year bonds issued by the Japanese government at interest rates just over 1.0 percent." That's what's worrisome.
Posted by: Anonymous | October 27, 2009 2:47 PM