Statistics don\u2019t always tell the full story, and the U.S. national debt is evidence as to why.\u00a0<\/p>\n
Despite its $39 trillion national debt, the U.S. barely cracks the top 10 in countries for debt relative to the size of their economies. While on the surface this may seem like a good thing, economists warn that actually, the U.S. still has more to worry about than even the countries with ballooning debt-to-GDP ratios.<\/p>\n
The U.S. still has the largest national debt of any other country\u2014with the total topping $39 trillion in May<\/a>\u2014more than double China\u2019s $18.7 trillion debt, according to the most recent IMF World Economic Outlook data<\/a> published in April. However, relative to the size of the economy, America\u2019s debt ratio, about 126%, is still considerably smaller than Japan\u2019s 204% and Singapore\u2019s 172%.\u00a0<\/p>\n There\u2019s no magic number for when a debt-to-GDP ratio becomes dangerous, but Japan\u2019s 200% signifies that the country\u2019s national public double is double the size of its economy. In other words, if a country were to devote all economic gains toward paying off its debt, it would still take two years to pay the debt down completely.\u00a0<\/p>\n Even with a lower 122% debt-to-GDP ratio<\/a>, the U.S.\u2019s borrowing is still greater than the size of its entire economy. Apollo<\/a> chief economist Torsten Slok warned the staggering rate at which the U.S. is accumulating debt\u2014about $7 billion per day<\/a>\u2014is atrophying the U.S.\u2019s ability to respond to a recession<\/a>. That\u2019s because the U.S. can\u2019t readily add stimulus to the economy, such as tax cuts or infrastructure spending, lest it goes deeper into the hole. But the Federal Reserve also can\u2019t cut rates to incentivize borrowing because it runs the risk of hiking inflation and disrupting the demand balance for new bonds.<\/p>\n \u201cThe U.S. has never entered a recession with this little fiscal buffer,\u201d Slok wrote in a blog post<\/a>. \u201cThe standard recession playbook that growth slows, the Fed cuts, rates fall, and multiples expand breaks down when the sovereign borrower is already stretched.\u201d<\/p>\n Yet economists aren\u2019t sounding the alarm on Japan\u2019s debt levels like they are with the U.S.\u2014and others are calling foul on the use of debt-to-GDP ratio as a valid measurement of economic stability altogether.<\/p>\n Why Japan\u2018s debt is different from the U.S.<\/p>\n Japan has defied the logic of expanding its debt without toppling its economy primarily because of how its debt is structured. About 90% of the country\u2019s government debt is held domestically, in local banks and insurance funds, meaning there are few foreign investors who could dump bonds in moments of global economic panic. Japan also has a household saving rate<\/a> worth about one-third of the country\u2019s GDP\u2014double that of the U.S.\u2014with households saving more aggressively for longer retirements, further reducing Japan\u2019s reliance on overseas bondholders.<\/p>\n \u201cJapan\u2019s debt dynamics are fundamentally different from those of the United States,\u201d Jack Salmon, a research fellow at the Mercatus Center at George Mason University, wrote in a Substack post<\/a>. \u201cJapan is the world\u2019s largest creditor nation. The U.S. is the world\u2019s largest debtor.\u201d\u00a0<\/p>\n But just because Japan isn\u2019t as vulnerable to a recession doesn\u2019t mean it\u2019s a perfect example of why debt can continue to balloon under the right circumstances. Japan\u2019s yen is depreciating<\/a>\u2014 exacerbated by the Iran war pushing up oil prices, U.S. inflation concerns, and increasing demand for the dollar\u2014and long-term bond yields are increasing. To fight this inflation, Japan must increase interest rates, which also raises the cost of service debt. Prime Minister Sanae Takaichi intends to increase deficit spending to spark economic growth, but risks stoking inflation further<\/a>.<\/p>\n \u201cJapan was never a comforting counterexample to concerns about U.S. debt,\u201d Salmon said. \u201cThe fact that even Japan is now testing the limits of debt tolerance should finally end the fantasy that advanced economies can borrow without consequence forever.\u201d<\/p>\n