Eli5: How can some country have trillions of dollar in debt like Japan but still functional without any consequences?


Eli5: How can some country have trillions of dollar in debt like Japan but still functional without any consequences?

In: 101

Because most of the debt is internal. I watched a video snot it awhile ago but can’t explain it like I’m 5

Well as long as the benefits of your investment exceed the interest rates everything is fine…

<insert here all analysis you want>

In the end money/dept is a Ponzi scheme and it will all come crashing down sooner or later

Because not all debt is bad.

Just like buying a house puts most people into a large amount of debt the benefit is greater than the interest repayments.

Nations who get into debt to pay for large scale infrastructure projects that will have a benefit to the economy is seen as a good thing.

However nations get into debt to pay for commitments are often seen as bad, again putting it into an equivalent for personal finance you may use a credit card if your car suddenly breaks but you wouldn’t use debt to pay for something frivolous like a balloon animal at an amusement park

What consequences would you expect there to be? There ARE consequences for having such a large national debt, see how Moody’s downgraded Japanese debt to Aa3 to A1 recently, still considered prime but the 4th rung of creditworthiness they have.

To be honest, most of the consequences of having a high national debt are fairly difficult to explain because they require a lot of financial literacy, and even then a lot is based on subjective impressions of a debtor, not some sort of science.

To try and put it simply, a country issuing debt is a core feature of the modern nation state and no country on earth could function without that ability. Debt is how you have the liquidity to do anything, and as long as you don’t default or restructure your debt, there is very little reason that debt would be seen as a negative.

national debt means pretty much nothing unless the country is otherwise struggling economically

(especially in the us) most of that debt is owed to citizens and companies of the same country too

Depends to whom it is owed. Japan has a low level of external debt, so most of this is money owed to themselves. They control the rate they pay it down. At current rates (under 1% on 30 year bonds) the interest burden is low, so as long as the Japanese economy grows as fast as the interest rate (it’s averaging around 2% over the last 30 years), it’s manageable. If you owe in foreign currencies you have a problem.

How can ordinary people have $500,000 of debt (mortgages, etc.) and still be functional? Same reason:

The payments required to pay it back are within their capabilities, and spread over a long term.

Japan is VERY boring (in a good way). It has a stable society. The stability is vital – its when political events start getting “weird” that people have a tendency to take their money off debt and secure it elsewhere.

Most of that debt is internal, and at low interest rates. Japanese citizens are very prone to saving, so they finance the country.

Also because its internal, even the interest paid on that debt flows either back into savings or into the economy, so its not that harmful – unlike “exporting” money abroad. Countrywise, you’re paying interest to yourself…

In short, nobody expects Japan to simply stop paying debt, so its a safe bet – and in a world of uncertainty, that actually becomes more valuable.

Because debt isn’t bad, and scale matters.

Debt is simply a promise to do something in the future. Nations can afford to make lots of promises to a lot of people, because nations have vast economic and military power, and they can make good on those promises.

It is very useful to exchange promises instead of just physical goods or immediate services. Especially when you’re planning 5, 10, 20, 50 years down the line, which is what nations do.

Promising something you can’t fulfill is bad. That’s why huge individual debts are bad – because often individuals make promises they can’t fulfill. But these nations *can* fulfill their promises, and as long as that continues to be true, it’s not a problem for them.

“Without any consequences”?! Japan went from suffering a “lost decade” of economic growth in the 1990s to “lost decade**s**”.


One part is because of that unique property : In capitalism, one’s revenue is another one’s expense.

National debt (debt of the government to its own citizen companies) mean the government give money to its citizen making its economy work.

A government that “make” money to pay back its debt would, by that first statement, be taking money away from its own citizen.

Debt to other countries is a bit different but this is ELI5 and the international economical system is not ELI5 compatible (some would say on purpose 😛)

Nations debt is not the same kind if debt as private individuals gets.

It doesn’t matter how much debt as major economies have nowadays, they will always get more because they keep paying their old debts with new.

Now this system works, just as it is intended; as long as the local and global economy keeps growing, and there is steady inflation. You have to remember that inflation eats away the value of debt, and as economy grows it needs more money.

Goverment debt is not a bad thing, as long as it pushes forward economic growth. Even debt used to fund welfare supports the economy by allowing poor/unemployed/etc people to participate in the economy. It is better to have those people as economic factor than not… also stability of society is important for modern economy to work

National debt is not indicative of economic stability, as proven by countries like Japan. There’s an important distinction to be made between the national debt and the deficit. The. *national debt* is the sum total of all of a given country’s debt, public and private. Essentially, it’s everyone’s mortgages, car loans, student loans, or whatever other loans that people would ever take out all added up. The *deficit* is the difference between the amount of money a government raises and the amount of money it spends, or essentially the amount of money the government needs to borrow to pay for all the stuff it does. Large *deficits* can be bad for an economy, but *debt* in and of itself has a very low correlation with economic activity and growth; as a matter of fact the things that people incur debts to pay for (houses, cars, or whatever you buy with a credit card) actually help economies grow, so it can be argued that debt is required for a country’s economic welfare. *Deficits* on the other hand, can hamstring a government’s ability to continue providing essential services to its citizens, and that’s why you’ll see a lot of talking heads saying they are a bad thing.

Japan has a huge amount of *debt*, but most people in Japan are able to pay off this debt. They have to go to work to pay off their debts, pay for goods and services that allow them to go about their day, and whatever assets they incurred debt for typically continue to gain value over time. For as long as the Japanese are able to pay off this debt, it’s no problem. Once this debt becomes overbearing, and people have to start sacrificing participation in the economy (not buying crap) to pay off this debt, it becomes an issue. Until then, there’s no problem at all with the national debt.

Interest rates on Japanese government bonds are extremely low, so, for example, last year [Japan only paid 0.4% of GDP](https://thediplomat.com/2022/02/crying-wolf-japans-ministry-of-finance/) for interest on their debt. For comparison, the US pays about 1.5% of GDP towards interest every year.

By paying it on time, everytime and making sure that everyone is confident that it has the capacity to do so in the future…

As long as the markets have “faith” or confidence in the ability to repay, they will buy those bonds.

And if there’s nothing more “attractive” from a risk/reward pespective they’ll get cheap rates for it too…

Their debt is at very low interest rates, so they don’t have to pay much interest each year relative to the entire government budget. The problem isn’t the debt per se, it’s that their economy isn’t growing, so their government budget doesn’t grow either

At a very high level, it’s because countries don’t die (like people do).

On the personal finance level, there comes a point where the banks know that your income won’t last to pay off the debt, so they will quit lending to you (reverse mortgages and other forms of asset-based debt excepted).

Countries don’t have that problem, so they can borrow indefinitely.

As long as the return from a project – the borrowing cost > inflation, the project isn’t “costly” over time.

Countries have debt because they issue bonds. As long as they can pay back the bonds according to their interest and timeframe stipulations, it’s OK. Sort of like how somebody can still afford to buy groceries while having a home mortgage (debt) that’s 3x their annual salary.

Japan debt is largely owned by Japanese and not external countries or banks. No one can short it for benefits.

People trust Japan to make their credit card payments.

Think about it from the lender’s point of view: would they rather you max out your cards and pay them interest every month, or give them enough money to pay off the debt? They *want* you to owe them a lot of money. Collecting interest on money you owe them is where they make their profit!

So long as Japan has a good credit rating, able to make all their payments and serious about making sure interest payments are a top priority, people will happily lend to them. That’s what investors are looking for, after all; places to put their money where they can get a return.