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U.S. Government's Debt Load is Worse than Japan


Ron DeLegge, Editor
August 21, 2013

The national media and economists say that Japan has the highest public debt of any developed nation, but the reality is the U.S. government’s debt load is much bigger and much worse.

New research from Markus Jaeger, director of global risk analysis and Deutsche Bank observes:

"When assessing public-sector debt sustainability, it would be negligent to disregard implicit government liabilities. Gross and net debt ratios provide merely a snapshot, failing to capture medium-and long-term fiscal dynamics. If one sums up government debt and the implicit debt arising from government pension and healthcare spending commitments (appropriately discounted), the U.S. government’s debt is almost twice as large as Japan’s and almost three times as large as Germany’s.” (See Figure 2 below)

The mainstream press was quick to cover the big story about how Japan’s public debt recently passed 1 quadrillion yen (NYSEARCA:FXY), which is roughly equivalent to $10 trillion in U.S. dollars (DX-Y.NYB). But they overlooked the other pertinent facts: How the U.S. government has been understating its public debt (NYSEARCA:TLT) for years. 

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In a Wall Street Journal piece late last year, Chris Cox and Bill Archer estimated the federal government’s actual liabilities to be $86.8 trillion or 550% of gross domestic product (GDP). The analysis included not just the headline debt figure of $16.9 trillion, but other significant costs the government is on the hook for including Social Security, Medicare, and federal employees' future retirement benefits. By comparison, Japan’s debt-to-GDP ratio is expected to hit 230% in 2014.

Other estimates put the federal government’s total liabilities at $70 trillion. And the cruel demographics of an aging population won’t help.

“The fact is that fertility rates in virtually all advanced (and most top-tier emerging) economies have already fallen to, or below, replacement levels. Absent immigration, all of them are set to experience not only population aging and population decline over the long term, but they will also experience declining labor forces and rising dependency ratios,” adds Jaeger. (See Figure 1 above)

Did I forget to mention how higher interest rates make servicing all of this debt a challenge?

The yield on 10-year U.S. Treasuries (^TNX) has surged 53% since the start of the year from 1.83% to almost 2.90%. And investors in long-term Treasuries have been clobbered with double digit losses near 13%.

Conversely, properly positioned investors and traders in inverse or short Treasury funds that gain in value when bond prices decline like the ProShares -2x Treasury 20+Yr Bear ETF (NYSEARCA:TBT) and the Direxion -3x Treasury 20+Yr Bear ETF (NYSEARCA:TMV) have enjoyed gains between 24% to 34% year-to-date.

Undoubtedly, the financial stress of an aging population and exploding public debt will result in a financial reckoning day.

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CommentsAdd Comment

Ron the Editor said on August 23, 2013
  Hi Ted,

The Japanese GDP data in FIGURE 2 is based upon 2011-12 data...thus it's "only" 160% or so. We still don't know how ugly 2013 figures will be because the year isn't yet over. But the 2014 projection is for Japan’s debt-to-GDP ratio to hit 230%. The chart is correct.
Tedd Potts said on August 23, 2013
  There seems to be a discrepancy. The article says "by comparison, Japan’s debt-to-GDP ratio is expected to hit 230% in 2014" but the chart shows Japan's debt-to-GDP to be around 160%, including "implicit' debt. Is the chart wrong? I've been looking for data like this for years, so this is important to me,
crinnyu said on August 22, 2013
  "Debt is a state of mind."
Jack Lewd said on August 21, 2013
  No problem. We just print our way out of debt. I'm the new Treasury Secretary in town!
BakerGirl said on August 21, 2013
  BTW, what are the interest payments on $86 trillion? Are there any calculators that count that high? good article. Sad but true.
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