History of the Public Debt - US/UK/Japan Course: Case Studies in Management Science Professor: Dr. Walt Pohl Semester: Spring Semester 2012 Student: 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? Debt History2

Agenda Introduction Basic concepts in the context of debt US UK Japan Comparison Conclusion Bibliography Debt History3

Basic concepts in the context of debt 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) Debt History4

History of the Public Debt in the US Debt History5

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 ( ) The interest coverage cost is declining due to falling interest rates Debt History6

Alternative: Public Debt by President Debt History7

History of the Public Debt in the UK Debt History8

Characteristics War debt: Napoleonic Wars (1815)  Debt/GDP Ratio 280%, interest 12,5 %  Pund Sterling world´s reserve currency World War I ( )  Debt/GDP Ratio 150 %, interest 7,5 % World War II ( )  Debt/GDP Ratio 240 %, interest 7,0 %  UK refused to pursue inflation till Debt History9

History of the Public Debt in Japan Debt History10

History of the Public Debt in Japan Debt History11

Characteristics 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 Debt History12

Comparison Debt History13

Comparison Debt History14 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

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 Debt History15

Bibliography history/ history/ inflation-in-uk/ inflation-in-uk/ national-debt-in-japan/ national-debt-in-japan/ ridden-economy-collapses/ ridden-economy-collapses/ staatsverschuldung-japan-ist-nicht-griechenland/ html staatsverschuldung-japan-ist-nicht-griechenland/ html Debt History16