Us: Inflation or decline!

This chart shows the ratio of government debt to GDP for 200 countries, large and small, by the end of 2021. It also represents the debt burden of each country.

Among them:

Japan’s government is in first place, with a debt-to-GDP ratio of 257%;

Sudan ranks second, with 210% debt to GDP;

The Greek government is in third place, with a debt-to-GDP ratio of 207%;

It was followed by Eritrea, Cape Verde, Italy, Suriname, Barbados, Singapore, Maldives, Mozambique, the United States and Portugal. Each of these 13 countries has a government debt /GDP ratio of more than 130%, which is also the world’s highest debt burden.

Among them, each small country’s debt has its own special reason; there is no common denominator, as the US has said many times in previous articles. Today, I want to talk about Japan and Italy.

The deterioration of the government’s fiscal balance sheet stems from the bursting of the bubble economy in 1991. To bail out troubled conglomerates and banking groups, Japan’s government debt-to-GDP ratio exceeded 80% in 1994 and 100% in 1997.

A leaky house may rain at night. In the second half of 1997 and 1998, the Japanese economy was hit by the Asian financial crisis, and the government stepped in again. To bail out companies and banking institutions, the government’s debt-to-GDP ratio has quickly reached 113%, which is beginning to become unsustainable.

Alas, the economy has been flat ever since, meaning it cannot grow enough to reduce its debt burden — in response; the Bank of Japan cut its benchmark interest rate to zero for the first time in September 1999. It was the first country in human history to lower nominal interest rates to zero in order to reduce the government’s debt burden.

As I have noted in previous posts, any large or medium-sized economy that has a government debt /GDP ratio of more than 100% cannot expect high growth. Without economic growth, the debt /GDP burden cannot be reduced and the economy as a whole will stagnate.

This is the case in Japan. The economy has been essentially stagnant since the bubble burst.

Fortunately, the Japanese government’s debt is mostly domestic, which means it is denominated in yen. It is not a crisis like the foreign debt of many small countries.

Really can’t, and the central bank printing machine!

So Japan’s debt dragged on until 2008, when the global financial crisis hit the economy again. In 2009, Japan’s government debt /GDP were an eye-popping 200%! It is the first time in human history that government debt has reached such a high proportion in an advanced economy. This is the first time in human history that government debt has reached such a high level, leaving aside weak military regimes.

With a debt ratio of 200% to GDP, the Bank of Japan has since embarked on its long-term zero interest rate policy — and by 2016 it had even lowered its benchmark interest rate to minus 0.1%, officially entering the era of negative interest rates.

When the pandemic hit in 2020, Japan’s government debt /GDP reached 266%. The current 257% is already down nearly 10% from 2020.

Indeed, comparing the levels of government debt with their GDP growth in Japan and Italy, it is clear that: When debt-to-GDP growth has exceeded 100%, the two economies have never grown by more than 3%, except for the nadir of the Japanese economy after the 2008 financial crisis (a sharp contraction in the previous year) and the nadir of the Italian economy after this pandemic in 2021 (a sharp contraction in the previous year).

Japan and Italy, let alone 3 percent, have been growing at less than 2 percent for most of their economies, and many of them have been negative — as we all know, in the era of credit and money, when there was little political upheaval, growth was often negative, meaning that their economies were actually stagnating or going backwards.

In 1996, Japan’s debt /GDP reached 100%, and in the 25 years since then, Japan’s GDP has “grown” from $4.83 trillion in 1996 to $4.9 trillion today in nominal dollars, an increase of $70 billion. But Japan’s share of the world’s economy has fallen from 15.3 percent to less than 6 percent today, more than half of that in relative terms.

In 1992, Italy’s debt /GDP exceeded 100%. In the 30 years since then, its GDP has “increased” from $1.32 trillion to $1.93 trillion today, in dollar terms that have depreciated every year. That looks like an increase of $610 billion. But in fact, if you look at the size of the Italian economy as a percentage of the world, it’s gone from 5.2% all the way down to 2.2% now, which is also more than half the size.

This is the power of society-wide debt deflation after government debt /GDP exceeds 100%.

Italy, the euro zone’s third-largest economy, is Japan’s cousin.

Before joining the euro, the Italian government was notoriously prone to borrowing. But back then Italy had its own currency, the lira, which, as long as it borrowed internally, could suddenly print money, devalue, and so on. Nominal GDP would soar, nominal debt would not suddenly increase, and the government’s debt burden would immediately be reduced.

As a result, Italy has always been one of the most reluctant of the G7 (America, Japan, Germany, Britain, France, Italy and Canada) industrialized countries, capable only of doing simple processing. Of the seven largest European economies (Germany, Britain, France, Italy, Spain, Russia and the Netherlands), Italy is also known for being unreliable.

For example, in the late 1980s, the ratio of government debt to GDP was over 90 percent, which was extremely high among European economies and consistently ranked first among the big 7 European economies.

In 1992, Italian government debt was over 100% of GDP;

In 1994, Italian government debt was over 120% of GDP;

After all, by the end of 1991, the Treaty on European Union had been signed, the euro was in the making, and Italy was a member of the European Union. The Treaty on Economic and Monetary Union, part of the EU treaty, stipulates that the ratio of government debt to GDP cannot exceed 60 per cent as a condition for joining the euro…

In order to join the euro zone, Italy also fought to reduce its debt-to-GDP ratio for the next three years, bringing it to around 105%. The European Union finally recognized Italy’s efforts. At the end of 1999, Italy joined other big European countries in the euro settlement system. The country officially switched its currency to the euro in 2002.

The Italians believed that the euro would stabilize their currency, and that they would be able to take over less-skilled manufacturing from other countries in the EU and sell products to their EU partners.



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