Debt junkees

How much debt can a country afford? Japan currently holds the highest net debt-to-GDP ratio among G7 countries at 234%. However, much of this debt is domestically held, primarily by the Bank of Japan, which keeps interest rates at low levels. The US, with a net debt-to-GDP ratio of 123%, faces a debt challenge that the Trump administration aims to address, although we believe the proposed measures are not the right solution. The debt can only be sustained as long as foreign countries continue to buy US dollars and debt. However, with the ongoing crisis of confidence in US exceptionalism, foreign investors may demand higher interest rates, which could drive yields to levels that make it difficult for the Treasury to refinance the debt, especially amidst significant budgetary pressures caused by rising interest costs.

Germany, under the new leadership of Chancellor Merz, has more room to leverage its finances, allowing for increased infrastructure and defense spending, both of which have long been overdue. The future path remains uncertain, but high debt levels will undoubtedly continue to pose challenges for some countries, dampening economic growth and limiting flexibility in fiscal policy.