US Government Debt Different - Finance Department - University of ...

Peter R. FisherU.K. prospered greatly for the next one hundred years. What wentright? While there are a number of factors, I would focus on fivethings.91First, the U.K. had “sources of income somewhat in excess of apparentGNP” – that is, they had an empire or, at least, they were buildingone. However one measures the size of the U.K. economy in theearly 19th century, my hunch is that we underestimate the benefitthey derived from their expanding empire.Second, they had a “big pool of savings” - much of it already investedin government borrowing to finance the war effort.Third, they had the “dominant wealth storage and transfer technology”of the day, in the form of the U.K. banking system (supportedby the Bank of England), to efficiently intermediate between sourcesand uses of that pool of savings.Fourth, they had “creditor-friendly government policies” in a governmentsympathetic to the interests of the creditor class.And, finally, as a consequence of that creditor-friendly attitude, theyexplicitly adopted a policy of deflation, as Parliament made the consciouschoice of seeking a return to the pre-war price level. The deflationthat they engineered had a profound effect on English societyand politics (recall the Corn Laws) but it certainly proved beneficialto bond holders.Japan: Getting by with 200 percent debt-to-GDPNow, let’s briefly compare these five factors to the recent history ofJapan, with debt-to-GDP level of just over 200 percent.First, Japan’s current account surplus provides it with the modernequivalent of “sources of income in excess of apparent GNP.” WhileJapan’s current account position may begin to shift against them, itcertainly has been one reason that Japan has been able to sustain itshigh level of sovereign indebtedness with extremely low yields.