Eli5: How can some country have trillions of dollar in debt like Japan but still functional without any consequences?
In: 101
Japan debt is largely owned by Japanese and not external countries or banks. No one can short it for benefits.
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.
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.
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
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…
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.
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.
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
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 😛)
“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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