U.S. Government Job Stimulus Adding More Debt; How Are We Different from Japan?

 |  Includes: DNL, EWJ, IYF, KBE
by: Daryl Montgomery

The future of U.S. fiscal policy can be seen in Japan today. The Japanese government announced on December 8th a new $81 billion stimulus package to prop up their sagging economy. This is only the latest of a long string of stimulus measures that have been enacted since the early 1990s. All of them worked for only a short time and then had to be followed up by new stimulus measures.

The same day, President Obama was announcing a new job creating stimulus package for the U.S., even though the U.S. economy is supposedly already in recovery and the December jobs report indicated an improved employment picture. Investors should keep in mind that action speaks louder than words (and questionable statistics).

The latest Japanese stimulus package will be used to prop up regional economies, for public works projects (a perennial favorite of their failed stimulus packages for more than 15 years), for energy efficiency initiatives and loan guarantees for small businesses. In contrast, the Obama plan will focus on helping small businesses, energy efficiency initiatives, and public works projects involving transportation infrastructure. Looks like a copy of the Japanese approach to me.

The idea is to pay for it with $200 billion of unused TARP funds. The only impediment to that is that the original bill specified that this money should be used for reducing the U.S. budget deficit. The Obama administration clearly has no intention of doing this and the implications for an already out of control budget deficit and spiraling U.S. national debt are clear.

The Japanese were once fiscally responsible, but that ended long ago with the failure of their banking system in the early 1990s. The picture in the U.S. for 2007 and 2008 is quite similar - in regard to the banking failures that is, not the fiscal responsibility. Despite an almost endless succession of stimulus plans, the economy has fallen into recession over and over again. This should be thought of as the modern Keynesian version of a depression.

The cost of all the government programs has been tremendous. The ratio of public debt to GDP in Japan is estimated by the IMF (International Monetary Fund) to be 218% this year. This is the highest by far of the top economies. It is expected to rise to 246% by 2014. The Japanese budget deficit this year is expected to exceed tax revenue. They have only managed to get away with this by keeping interest rates close to zero for more than a decade. Time is running out for them however. They are already engaging in money printing to pay for government operations and this will eventually turn their long running deflation into a very serious inflation problem.

The U.S. which is at the earlier end of the 'banking crisis with never ending bailouts' curve currently has a public debt to GDP ratio that is supposedly only 83% (if you adjusted the official government GDP numbers to something more realistic, it would be 110% or more). The budget deficit in fiscal 2009 was $1.42 trillion - and that was considered good because it was less than expected. The national debt increased by $1.9 trillion however. Intergovernmental transfers and off-balance sheet items account for the discrepancy. The U.S. national debt is now over $12 trillion and rising rapidly. Keeping short-term interest rates close to zero allows this to continue since 44% of the debt is funded with bills of one-year duration or less. An examination of the 2010 U.S. federal budget shows that 40% of the funding is expected to come from borrowing. Money printing would be included in the borrowing category.

There are worries in the Eurozone about Portugal because it's expected to have a public debt to GDP ratio of 90% by 2011. The official U.S. numbers could be just as bad (the actual ones much worse). As the largest economy in the world and the issuer of the world's reserve currency, the U.S. has a lot more leeway in fiscal irresponsibility. The limits of that leeway will probably be revealed in the next few years in Japan.

Author's Disclosure: Not relevant