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.
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.
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.
“Without any consequences”?! Japan went from suffering a “lost decade” of economic growth in the 1990s to “lost decade**s**”.
https://en.wikipedia.org/wiki/Lost_Decades
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