…The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.
The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”…
…We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.
Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.
The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.
Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.
Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.
It is that last bit which ties us to the problem – if Japan has to start dumping US notes in order to pay interest on Japanese notes, then the bottom is really and finally out of the tub.
All of this is the result of fiat money and usury – nothing wrong with paper currency and nothing wrong with charging interest given the time value of money. The problem comes in when your currency is not backed by any hard asset – then investors start demanding 8, 10 and 15 percent returns on investments because they need to not only make a profit, but cover the loss in currency value as time goes on. If we had sound money – and, yes, I prefer we return to the gold standard…you kids out there, see if you can find a US coin minted 1964 or earlier…compare it to a coin minted afterwards…note that the older coin is actually made of silver, the newer coins are made of feces – then we wouldn’t have got in to this mess.
Oh, to be sure, we wouldn’t have been able to pile up the money as fast as we did – but where did all that money go? Well, a collection of financial sharks have gotten fabulously wealthy – but me and you? Well, we’re stuck with literal tens of trillions of dollars of debt and unfunded government mandates. We can’t build wealth fast enough to cover the debt, let alone increase our net wealth, unless we go back to a currency which holds its value over time.
Japan is the model – they have followed “Obamanomics” for the past 20 years. Having complete faith in the Keynsian model of “pump priming”, they have piled up massive debt in order to “inflate” themselves out of recession. And now all the money is gone up in smoke – and Japan sits on the cusp of complete economic meltdown. And this is where Obama and his liberals want to lead us.
We dare not go. As was famously said, some times being “progressive” means you realize you took a wrong turn waaay back there and so you head back to where you messed up, and start all over again.
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