The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
With all this discussion about austerity and controlling spending, there is one country that stands above all the rest, Japan. There hasn’t been a chirp from the central banks about the need for Japan to take austerity measures, threat of default, and collapse of the economy or anything. Japan’s debt is in 1.8 times their GDP or 180% of GDP. The U.S is almost at 100% of GDP, but this isn’t the first time in our history to be at this level. Right after World War 2, the United States reached this level and we grew our way out of it. Now credit downgrade, no default nothing happened.
So why is the U.S being bullied to take austerity measures, but Japan is in the clear?
It is true that Japan has massive amounts of debt, but personal financial strength is also enormous. The Japanese are the “savers” of the world. Personal savings in Japan is 1,400 trillion yen. 90% of Federal debt in Japan is held by domestic investors, including Japanese banks, so if a default is feared, the domestic institutions and people just sell their bonds and the money accrued will circulate within their own borders, capital is not extracted into other countries.
Japan could face problems in the future due to wages dwindling and an aging population. This is the difference between the Japanese and the Americans. The American worker is in massive debt. We do not have financial strength. Many Americans are 10K dollars in credit card debt, and the savings rate is in the negative.
Japan credit rating was just recently downgraded by S&P in January of 2011, stating, much like the U.S downgrade, political discourse and lack of strategy.
“The Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country’s debt dynamics,” S&P said. “We even see a risk that the Diet [the lower house of parliament] might not approve budget-related bills for fiscal 2011, including government financing authorization.”
During the 1950s 60s, and 70s the United States citizens much like today’s Japanese citizen had wealth. We made good wages and saved money. Unfortunately, ever since Alan Greenspan and Reagan instituted supply side economics and we saw the crushing blow to American wages and an increase in easy credit.
What happened next was, the U.S citizen compensated their lack of wage growth with their credit card and thus we are where we are today.
Many people didn’t hear about the Japanese downgrade and Japan isn’t being compared to Greece, Portugal, Spain, Ireland or Italy, why? Personal wealth!
America needs shared prosperity and shared sacrifice if we are really concerned about our future standing in the world.