Published August 21, 2013
The national media and economists say that Japan has the highest public debt of any developed nation, but the reality is the U.S. government's debt load is much bigger and much worse.
New research from Markus Jaeger, director of global risk analysis and Deutsche Bank observes:
"When assessing public-sector debt sustainability, it would be negligent to disregard implicit government liabilities. Gross and net debt ratios provide merely a snapshot, failing to capture medium-and long-term fiscal dynamics. If one sums up government debt and the implicit debt arising from government pension and healthcare spending commitments (appropriately discounted), the U.S. government's debt is almost twice as large as Japan's and almost three times as large as Germany's." (See Figure 2 below)
The mainstream press was quick to cover the big story about how Japan's public debt recently passed 1 quadrillion yen (FXY), which is roughly equivalent to $10 trillion in U.S. dollars (DX-Y.NYB). But they overlooked the other pertinent facts: How the U.S. government has been understating its public debt (TLT) for years.
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In a Wall Street Journal piece late last year, Chris Cox and Bill Archer estimated the federal government's actual liabilities to be $86.8 trillion or 550% of gross domestic product (GDP). The analysis included not just the headline debt figure of $16.9 trillion, but other significant costs the government is on the hook for including Social Security, Medicare, and federal employees' future retirement benefits. By comparison, Japan's debt-to-GDP ratio is expected to hit 230% in 2014.
Other estimates put the federal government's total liabilities at $70 trillion. And the cruel demographics of an aging population won't help.
"The fact is that fertility rates in virtually all advanced (and most top-tier emerging) economies have already fallen to, or below, replacement levels. Absent immigration, all of them are set to experience not only population aging and population decline over the long term, but they will also experience declining labor forces and rising dependency ratios," adds Jaeger. (See Figure 1 above)
The yield on 10-year U.S. Treasuries (^TNX) has surged 53% since the start of the year from 1.83% to almost 2.90%. And while long-term Treasuries holders have experienced double digit losses near 13%, inverse Treasury funds that gain when bond prices decline like the ProShares -2x Treasury 20+Yr Bear ETF (TBT) and the Direxion -3x Treasury 20+Yr Bear ETF (TMV) have jumped between 24% to 34% year-to-date.
Undoubtedly, the financial stress of an aging population and exploding public debt will result in a financial reckoning day.
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