Monday, December 17, 2012

Will the catalyst be Japan?

Which country has the biggest government debt-t0-GDP ratio in the world?

Which country went into recession two decades ago, and has never really emerged?

Which country’s leader has signalled he intends to print money, QE to infinity, to monetise that debt?

The answer to all of these questions is not Greece, Spain or Italy. Nor is it the U.S.

It’s Japan.

With interest rates at zero and government debt more than double its GDP—and rising—and an aging population who have virtually denuded their savings in patriotically buying govt bonds, it has little hope of ever reducing that debt honestly, and no hope at all if interest rates ever rise.

Japan is the world champions at kicking the can down the road—zero interest rates and piling up govt debt for two decades in a desperate but vain attempt to create the “stimulus” theorists say should have resulted in prosperity—consuming capital and chewing up the pool of real savings like a shark at a city beach—producing only more debt, more “deflation,” falling wages, falling production, falling demand,  and two decades of stagnation.

And over the weekend, the Japanese election gave victory to the opposition Liberal Democratic Party, whose leader Shinzo Abe has for months been saying he will engage in quantitative easing beyond even the dreams of Bernard Hickey, printing paper money to monetise the debt and beyond—enough to turn “deflation” into raging inflation, and Japanese paper and government bonds into toilet paper.

‘He’s also on record as saying:

“he went into politics to help Japan ‘escape the postwar regime" and throw off the shackles of wartime guilt. In its place he has talked of creating a "beautiful Japan" defended by a strong military and guided by a new sense of national pride.

He also intends

to change the constitution to allow Japan to "have a proper military and defend its own territory, including every inch of Japan's sacred land and sea - including the disputed Senkaku or Diaoyu Islands”… Mr Abe belongs to that part of Japanese society that does not really believe Japan's wartime aggression against China and South East Asia was a crime.

The world is carefully poised for catastrophe. Something profoundly bad is going to happen somewhere to set it off.

Will the catalyst be Japan?

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10 Comments:

Anonymous the drunken watchman said...

Perhaps these money-printing manipulators will manage to oversee a muddling on forever by countries which will never achieve the prosperity they might have, but which will never succomb to catastrophe either?

Is catastrophe the only alternative outcome?

Even North Korea seems to manage to muddle on (albeit with a few food shipments from the USA :)

12/17/2012 06:33:00 pm  
Anonymous thor42 said...

Somehow or another, Japan has managed to stagger along for the last 20 years or so.

My own feeling (FWIW) is that the catalyst could actually be *China*.
They are the ones who are now acting like Japan used to.

12/17/2012 09:52:00 pm  
Anonymous the drunken watchman said...

thor42 says "somehow or another..."


prove to me that this is terminal, that Japan cannot "stagger on" forever

12/17/2012 10:39:00 pm  
Blogger Peter Cresswell said...

@Drunken Watchman:
Industrial output in Japan is lower than in 1990, and govt spending has gone up every year since then--and every year in deficit.
Up 'til now, Japanese savers have been allowing the Japanese govt to go so severely into debt by buying govt bonds with virtually no yield.
But those savings are now almost used up (the capital built up over half a century is being consumed), and the Jap govt will have to persuade non-Japanese investors to buy them. Or try to.
Or slash its spending.
At the same time, the aging population is about to retire, and will want to cash out the largest "investment" they have: govt bonds.
Think what both will do to their interest rates--when the govt is already paying 50% of it tax revenues on paying the presently low interest rates. If bond yields rise even to two percent, the entire tax revenue of 40-odd trillion will just be paying interest.
In other words, the govt will be insolvent, and looking for a scapegoat--possibly the South China Sea.
And think about who pays for all those retirees; in 1972 there was ten workers for every retiree; in 1993 there was five; in 200 there was 4; in 2005 there was three; now, there's just over two, and falling...
it's a sovereign debt bubble ready to collapse, "a bug in search of a windshield." If they monetise the debt so it happens in a long-drawn out way, it will still nonetheless eviscerate Japanese capital.
And if the reaction to collapse is militaristic ... ?

12/18/2012 09:31:00 am  
Blogger Peter Cresswell said...

"possibly IN the South China Sea."

Or across...

12/18/2012 09:32:00 am  
Anonymous thor42 said...

I actually agree with you, drunken watchman!

I'm saying that given that Japan has managed it for 20 years, there's nothing that I can see that will stop them.

12/18/2012 10:27:00 am  
Anonymous the drunken watchman said...


@PC

would you care to compare Japan's stats with North Korea's, and then predict which one will fall over first?

@thor42

whoops, i saw what I wanted to see in your comment, sorry :)

12/18/2012 10:51:00 am  
Blogger Peter Cresswell said...

@Watchmand; If the Slave State of North Korea were to drop off the map altogether, it would have no effect on the rest of the world outside those who have family enslaved there.

Japan, on the other hand...

12/18/2012 01:48:00 pm  
Anonymous the drunken watchman said...


@ PC

... but that wasn't my challenge

besides, you were talking about the possibility of military action by Japan being the catastrophe trigger.

So how about North Korea shooting off its nukes?

12/18/2012 02:53:00 pm  
Blogger Jason Quintana said...

Economic forecasting can make people look silly, but I think Japan the best candidate. Everyone (U.S., UK, Europe etc) has behaved terribly in the last 12+ years, but Japan got a head start. They also have demographics that doom their retirement ponzi schemes.

China has been engaging in monumental credit expansion, but it is harder to understand what the fall out will be. USA has the reserve currency, and can get away with its own nonsense for a bit longer. Would a Japanese default or hyper inflation lead to a lack of confidence in the dollar and the Treasuries? That is a critical question.

12/30/2012 09:37:00 am  

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