History of the Public Debt
US/UK/Japan
Course:
Professor:
Semester:
Student:
Case Studies in Management Science
Dr. Walt Pohl
Spring Semester 2012
Theresa Gebauer
Introduction
• Public Debt as a current and explosive topic in the media
• Arising questions:
What is public debt?
How did public debt arise?
How can public debt be measured?
How to compare national public debt?
Which level of public debt is dangerous?
What can make public debt dangerous?
How to handle public debt in different political systems?
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Agenda
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Introduction
Basic concepts in the context of debt
US
UK
Japan
Comparison
Conclusion
Bibliography
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Basic concepts in the context of debt
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Federal deficit vs. National Debt
Cyclical deficits vs. structural deficits
The Role of the National Bank
Monetizing Debt
Government Bond Yields
Inflation Rate
Exchange Rate
Interest Rates and the the interest coverage cost
4 ways to pay off government debt:
Run surpluses
Run a deficit that is less than the growth in national GDP
Inflate your way out
Outright Default ( currency reform)
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History of the Public Debt in the US
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Characteristics
• Government spending had typically peaked after wars:
Revolutionary War (1775 – 1783)
Civil War (1861 – 1865)
World War I (1914 – 1919)
Great Depression (1929 – 1941)
World War II (1939 – 1945)
Cold War (1945 – 1991)
Current Financial Crisis (2008 - )
• The interest coverage cost is declining due to falling interest rates
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Alternative: Public Debt by President
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History of the Public Debt in the UK
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Characteristics
• War debt:
Napoleonic Wars (1815)
 Debt/GDP Ratio 280%, interest 12,5 %
 Pund Sterling world´s reserve currency
World War I (1914 - 1919)
 Debt/GDP Ratio 150 %, interest 7,5 %
World War II (1939 - 1944)
 Debt/GDP Ratio 240 %, interest 7,0 %
 UK refused to pursue inflation till 1970
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History of the Public Debt in Japan
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History of the Public Debt in Japan
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Characteristics
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War debt due to the Russo-Japanese War (1905), World War II (1945)
Economic crisis in the early 90s
Earthquake, Tsuamni, Fukushima
Japanese private sector buys a lot of bonds
(About 95% of the debts are held domestically)
 So Japan was able to inflate its way out of its debt in the late 1940s
Interest rates are very low (Central bank rate is 0,3 %)
 So the interest payments on the debts are low
Inflation Rate is low
 The depressed state of the economy enables the Bank of Japan to
monetise part of the debt without causing inflation
Exchange Rate: The Chinese have been diversifying out of the USD and US
treasuries into Japanese bonds and thus the Yen, and other countries’
currencies.
Two decades of no growth
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Comparison
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Comparison
• Current debts are both structural and cyclical
• Japan has no economic growth and will therefore have serious problems
with reducing the level of debt, especially when interest rates are rising
On the other hand Japan is not dependent on foreign investors
• UK profits of being a financial centre and theresfore is able to raise money
to cover debt
The rise in debt is mainly due to cyclical deficit
Economic growth is difficult
• For the US a rise in interest rates could cause a financial crisis
Defaulting by inflation is not easily done as the Dollar is a reserve currency
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Conclusion
• There is no ceiling on GDP/Debt ratio: Whether the increase in Debt is
perceived as temporary and will decline when the cause is over is more
important
• The interest coverage cost is important: If its above 5% and continutes to
rise it could indicate a financial crisis
• Countries with reserve currencies find it easier to raise money to cover
government debts
• The reform must depend on the nature of the deficit (structural vs.
cyclical)
• Bondholders are mainly suffering from reforms such as inflation or a
currency reform
• Radical reforms make it difficult to borrow again
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Bibliography
• http://www.usgovernmentdebt.us/
• http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm
• http://krugman.blogs.nytimes.com/2011/12/31/a-thought-on-debthistory/
• http://www.economicshelp.org/blog/2647/economics/history-ofinflation-in-uk/
• http://www.economicshelp.org/blog/1202/economics/history-ofnational-debt-in-japan/
• http://socioecohistory.wordpress.com/2010/09/18/when-japans-debtridden-economy-collapses/
• www.globalfinancialdata.com/.../government_de..
• http://www.ftd.de/finanzen/maerkte/anleihen-devisen/:hohestaatsverschuldung-japan-ist-nicht-griechenland/60027193.html
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