Devil’s In The Details

Details matter, especially when dealing with financial markets. A data point taken out of context, or simply accepted at face value, can easily lead one to come to mistaken beliefs and conclusions. Mind your details!

The Debt/GDP Ratio Is NOT Useful. What You Need To Know 5

Data interpretation is more art than science

Japanese banks are a big part of the offshore dollar funding market, aka the Eurodollar market, of which Japanese Government Bonds (JGBs) serve as an important source of collateral.

This means that JGBs serve a purpose to a class of investors that goes beyond the normal considerations of debt sustainability and bond coupon payments.

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The Debt/GDP Ratio Is NOT Useful. What You Need To Know 4

Data interpretation is more art than science

However, low interest rates don’t necessarily mean that creditors will keep lending to a country.

If they deem Japanese interest rates to be too low for their liking, they can always invest in some other fixed income asset.

Capital is, after all, extremely mobile in this day and age, which brings us to a crucial factor in Japan’s debt “longevity” – creditors are willing to roll over the country’s debt, even at ultra low interest rates.

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The Debt/GDP Ratio Is NOT Useful. What You Need To Know 3

Data interpretation is more art than science

There is another, more important reason interest expense needs to be used when trying to understand an entity’s ability to sustain its debt.

That is, legally, defaults occur when one fails to make interest payments.

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The Debt/GDP Ratio Is NOT Useful. What You Need To Know 2

Data interpretation is more art than science

What are measures of stock and flow, and how are they pertinent to understanding the limitations of the Debt/GDP ratio?

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The Debt/GDP Ratio Is NOT Useful. What You Need To Know 1

Data interpretation is more art than science

The world has a debt problem.

Governments all over the globe were already heavily indebted going into 2020; and the wave of lockdowns, and in many countries re-lockdowns, only made things worse – to the tune of $24 trillion.

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