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Lessons From Japan On Debt Levels

In his testimony and Q&A session before the House yesterday, Fed Chair Bernanke stressed that the U.S. needed to keep it's debt-to-GDP ratio stable, even if it's at higher levels than we've been used to:

"there are countries that have 80-percent or 100-percent debt-to-GDP ratios. I'm not recommending that. But clearly you can't have a debt-to-GDP ratio which continues to rise indefinitely, so it's very important that we have now, or very soon, a plan to stabilize at least the debt-to-GDP ratio so that it doesn't go into a continued increase, which would -- which, because of interest payments, would make sort of a vicious circle going forward."

He no doubt had Japan's experience in mind. The chart below from IMF data shows Japan's debt-to-gdp ratio since 1980: 


You'll notice the run-up in debt-to-GDP got underway in the early 90's, right at the onset of Japan's "lost decade." A similar run-up for the U.S. could be quite disastorous since the Japanese at least where (and are) net creditors to the rest of the world.

(The IMF uses different criteria for calculating debt-to-GDP ratios than some news reports--it uses net debt, which is liabilities minus assets--so the Japan numbers here are lower than you'll see elsewhere.)

--Zubin Jelveh