Upcoming Government Funding Crises: Japan Edition

Tyler Durden's picture

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bugs_'s picture

Maybe we can get the Japanese to jump on board

the Amero.

Anonymous's picture

Oh man... All Japan needs to do is: 1) stop issuing public debt, and 2) lower taxes.

As for government, funding & crisis (and god only knows what more):
http://bilbo.economicoutlook.net/blog/?p=332 (part 1);
http://bilbo.economicoutlook.net/blog/?p=352 (part 2);
http://bilbo.economicoutlook.net/blog/?p=381 (part 3).

Please read. Deficit spending finances private saving. If it didn't, where does the money come from? Japan is simply doing all it can to maintain full employment (and spending power). You're free to call their deficit 'huge', but they're doing a good job. Pity Western governments no longer have that goal on top of their list...

Anonymous's picture

bomb china

dark pools of soros's picture

and Isreal.. they are both annoying

Anonymous's picture

Is Italy even worth bombing?

It's painful for Italians, but provides some amusement to the rest of the world...

Anubis's picture

Dude, I read some of those articles and also others on the same blog - but the amount of information and interconnected logical assumptions behind their theories (they call themselves Modern Monetary Theorists (MMT)) are really huge. Based on what I could snap up from the texts they seem to claim it's ok to run up unlimited amounts of debt and this should not cause any particular stress. While the benefits of being able to spend money are obvious (health care, schools, defence, employment, etc). 

 

I don't have weeks to read thru all their theories, though I will give it some time - but would you or others be so kind and tell me if MMT's think unlimited deficits are quite ok? 

I got it wrong, if so, where? And if I got it right - can you explain why there is supposedly no harsh consequences by running enourmous deficits? What about long term inflation, debt default risks, etc.? 

 

 

Gilgamesh's picture

Not enough people are talking about the US demographics.  We've got a few more retirees coming up.  How quickly can government's retirement age be pushed back?  And good luck funding not only their benefits but also inflows into equities with all those Extended Unemployment checks...

MsCreant's picture

Or push back the age you can serve in the military?

Tethys's picture

I would suspect that the US government has been thinking about demographics for a while and that is why, unlike Japan, they have done their best to keep the borders wide open.  Lots of young, cheap workers coming in and having lots of children - at a much higher rate than the 'natives'.  And those kids are instantly citizens.

Of course, this approach doesn't work so well when the job market tanks.

Stevm30's picture

Yes, that kind of long-sighted, deliberative thinking is exactly how our nation's leadership guides its actions...

pros's picture

Look at debt numbers for USA:

$billlions (12-10-2009 Fed Z.1 Release)

U.S. Govt (table d.3)                           $7,566.5

State and Local (d.3)                           $3,309.1

GSE debt/GSE gteed MBS (L.4)              $8,123.4  

Total                                                $18,999.0

 

3q GDP SAAR                                     $14,242.0

debt to GDP = 133.4%

 

add:   $7,944.3 debt of financial sector with implicit guarantee

         $2,100.0 federal reserve obligations

=    total of $29,043.3  or 203.9% of GDP

 

add unfunded liabilities of SS system (table IV.B6 2008 Annual Report of SS Trustees)

   $13,600.0

=$42,643.3   or   299.4% of GDP

 

The U.S. is insolvent by all accepted measures.

pbmatthews's picture

You left off unfunded Medicare Liabilities...another $35 trillion.

 

$77,643.3 or 545% of GDP

But then again, who is counting?

Stevm30's picture

One alternate outcome to hyperinflation, which will prevent ultimate collapse for up to several decades would be a world currency, and requisite world sovereignty to support it.  The creditor nations will demand, and receive, equality in the constituent parts of this body... (Bank of the World headquarters, Shanghai?)  Of course, any fiat system is destined to fail, and so will the world currency.  It just might take another generation to get there.  In the meantime, good citizens are encouraged to prepare... because the collapse of that currency will truly destroy civilization as we know it.

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." Lord Acton

Anonymouse's picture

I think I read something about a One World Government.  About 2000 years ago I think.

Can't remember where....

nabi's picture

That would be the book of Daniel, I think:

DANIEL 7:23 "Thus he said:  'The fourth beast shall be a fourth kingdom on earth, which shall be different from all other kingdoms, and shall devour the whole earth, trample it and break it in pieces.'" (NKJV)

Yep, he nailed that one almost 2,600 years ago...

Anonymous's picture

The perfect scenario if your a politician looking to save face. The exact scenario I've been discussing with co-workers for awhile. At least I'm not the only one thinking globally and not locally for the past 2yrs. Now I can say to my wife, "See, told ya so". Pretty pathetic isn't it?

SDRII's picture

good article in Atimes.com about leaked China/Japan repproachement (article in NYT last week if recollections erves). Japan has been edging away from US in terms of basing, policy poodle etc.

http://www.atimes.com/atimes/Japan/LA12Dh01.html

 

and Lui always a good read..

 

http://www.atimes.com/atimes/China_Business/LA12Cb01.html

 

D.M. Ryan's picture

Japna in an inflationary crisis... now that would be the shock heard 'round the world.

asdf's picture

they will be fine. Japan has the lowest external debt levels of all developed countries. If they're smart, the BoJ just buys the bonds from the pension funds. Japan has a core deflation of -2%, any kind of inflation fears in a land with a huge account surplus is la la land.

Oso's picture

kind of irrelevant when every government on earth is attempting to tap external capital markets.

 

further, as Grice points out, even a small increase in yields will be crushing in terms of debt service.

Anonymous's picture

From the Report:

"Japan’s government borrows from Japanese households and has done for decades. But
Japanese households are retiring, and traditionally retirees run down their savings."

I have a problem with the premise. Please, someone correct me if I am wrong. I am just a junior in college so I may get it wrong. This is my beef:

OK, so retirees run down there savings (traditionally) we know that. But
1) does this mean that young people won't/don't save for their own retirement?

2) Does this mean that the savings will disappear when the old folk decide to head into retirement and the kitty will be empty?

3) Is this a matter of demographics? are there more old people in Japan than young people? would this mean that savings of the young people wont be enough to replace that of the old?

4) and if the answers to question 4 are "YES". Then doesn't that mean that the gov't will have a smaller population to care for and therefore the smaller amount of savings would be sufficient for the smaller population?

5) Is it that the outstanding debt is much larger than what the young people could conceivably save and lend to their government? And if this is the case then couldn't this be addressed through some creative means like Debt Restructuring/Swap etc etc?

I don't know, I am an engineering student so I may be well out my league here. But I am just wondering why reports like these always assume that there is only one or a few ways to address the problems. I think many of us will be surprised if we live long enough to see when all theses economies adapt and reinvent themselves and continue to exist and thrive.

Feel free to tell me to shove off because I am spewing BS.

Oso's picture

1) yes, they will save.  but there arent enough aggregate savings to fund the government spending requirements.  So, yields will start to rise and government will have to turn to external borrowers.

2) savings will be used to live on.  food. water. clothing.  medical care. etc.

3) yes. and yes.

4) yes, but the old people havent agreed to die en masse within the next year.  retirement usually lasts 20-40 years ;)

5) yes. um.... no. 

hambone's picture

I really feel this is what those last moments prior to WWI or WWII felt like when the global system is under such strain and stress so as we can almost hear the creaking of the bulwarks...There are so many options as to which will be the spark that ignites the piles of dry tinder (Soveirgn default, commodity spike, blah blah).  Strange days when we maintain the present system, our present jobs but wonder for how much longer...and then what?  Minor adjustments, titanic shifts, chaos?  Who f****ing knows but the wait is strange.

Invisible Hand's picture

Hambone has echoed my feelings exactly.

I feel like I am in a out-of-control car on an icy road tensing for the impact but not sure if I will hit the guardrail, the tree or the oncoming semi.

If I was young and healthy, I would be less worried as I was always the smartest (one of anyway), hardest working guy in the room.  Now, older and ill, I know I cannot hope to win this fight and must simply await my fate.

That's a big change for Americans, who always thought they could do anything and controlled their fate.  However, this is how most people have always lived.  Small boats in a raging torrent, trying to steer towards a little success and happiness but knowing the odds are against them.

These will be the times that "try men's souls."  Sometimes, how you lose says more about your character than winning.

merehuman's picture

The big question is     WHEN? Will we have any warning other than what we have now?

Molon Labe's picture

Mostly, institutions go broke real slowly over a protracted period of time, and then all at once real fast-like.  The insiders know it is going to happen; but even they don't know when.  They hold on for as long as they can and hope for a miracle, trying to benefit as much as they can before the ship sinks.  Every now and then a miracle appears. 

Those fortunate enough to work for insolvent institutions like U.S. automakers, large financial institutions, huge conglomerate insurance companies, or non-governmental/governmental agencies with/without the backing of the full faith and credit of the U.S., will see their most diehard atheist co-workers have Saul of Tarsus like conversions as their taxpayer funded miracles materialize before their eyes just in time to save their bonuses, stock options, and pensions.

Those who are not so fortunate...

RobotTrader's picture

"The big question is     WHEN? Will we have any warning other than what we have now?"

Answer:  Most like, NEVER.

Japan has been running massive deficits as a percent of GDP for years, and financing it ad infinitum at 1.5% rates, and experiencing deflation at the same time.

Furthermore, Japan's Nikkei is outperforming every other index right now...


Anonymous's picture

My yen is rising right now.

Anonymous's picture

As a non-economist, I finally understand the meaning of hard currency.

Anonymous's picture

How about WWIII?

max2205's picture

No worries. Remember the Asian Union and it's new currency. Come on get creative!!!

Anonymous's picture

"Like banks in 2007, developed market governments today rely on sustained capital markets more than any time in their history. What if they shut?"

This is precisely why every government in this predicament will do everything possible - and there are many possibilities, some discussed in depth on this site - to sustain capital markets on their easy money trend, unintended consequences be damned.

Carl Marks's picture

Anyone have a yen for treasuries?

Anonymous's picture

Again with the hyperinflation.

Not gonna happen here. I'm not sure about the structure of Japan's commercial debts, but from memory - at the end of their bubble in 1989 people were taking out 100-year fixed rate mortgages to buy houses.

A country where ~$10 trillion in commercial mortgage loans are of the 30-year 5-6% fixed variety cannot function with 6% inflation, much less a hyperinflation.

In a possibly unrelated story AmEx raised my interest rate for the second year in a row. to 15.99% from 13.99%. Last year they raised it from 10.99% to 13.99%. When I opened the account it was advertised as a "low fixed rate forever" card. Guess they don't figure I remember that bit. Of course, it's all moot as I pay off the entire balance every month.

-ts

Anonymous's picture

Hyperinflation does not occur with an the scope of normal monetary functions. It occurs due to currency crises. The yen can still devalue, against say commodity prices. Although, asset prices may as well continue to fall in Japan. Ultimately if there is ever a panic in the sovereign debt market for japan and the yen that could lead to hyperinflation, or at least a large currency devaluation.

aus_punter's picture

I think the marginal seller of Yen is virtually non - existant.  Being short the long end of JGB's has been a widow maker of a trade for my entire career thus far..... his view may be correct at some point but it seems to be virtually impossible to monetise. 

The notion that Japan swings to hyper inflation whilst the rest of the world languishes in deflation seems like a bit of a stretch also

Anonymous's picture

If Japan went into hyperinflation and the Japanese government could no longer fill its funding obligations, foreign exchange reserves would be liquidated causing currency crises worldwide, though namely in the dollar.

buzzsaw99's picture

Japan's policymakers will be forced to sell assets, including US Treasuries currently worth $750bn...

Don't worry, zimben will buy them.

Psquared's picture

But they've still got Uncle Ben and his cronies. I am sure BofJ will (if not already) line up at the trough and the Fed will buy their bonds too. It already appears the USCB is allowing foreign banks to have access to the discount window. Seems like it would be an easy operation to buy their bonds and monetize their debt too.

We keep watching this slow motion train wreck and wonder when it will happen already but I think they have things up their sleeve they have not even tried yet. For that reason I wonder if they can't keep this going for years ... if not decades.

As a last resort they can resort to outright printing of dollars and skip the middle step.

Then, at the last moment, just before cart before the horse starts careening downhill, a currency reset, and bingo ... problem solved.

The black swan of course will be something like a 7.0 earthquake in Haiti or Google denying the Chinese access to its search engine.

 

Anonymous's picture

Thinking in balance sheet is of critical importance. In the report, there is a confusion on Japan's balance sheet and Japanese government's balance sheet.

Checking Japan's current account, you will find that it has almost always been positive. The closer look tells you that it is a combination of that of Germany's and Switzerland. It makes money from exporting high tech goods, and investing that money all over the world. Last year, it was like rather Switzerland than Germany. As a result, Japan as a country has been number one in the list of net asset countries 16 years in a row.

Do you really think world's No 1 net asset country will default? If so, how?

Check the new paper of Reinhart & Rogoff.
http://www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=460
In this paper, Reinhart and Rogoff write that Japan's external "gross" debt is much smaller than other countries including U.S.

About 95% of JGB is owned by Japanese. Although we are rapidly aging society, but that has nothing to do with our banks' ability to buy JGB. Elder people may not save a lot, and may spend a lot. Money does not simply disappear. The money spent by elder people comes to merchant or shops and then ends up Japan's banks which have to buy JGB, because there is no other safe investment vehicle than JGB in deflationary Japan.

I know Jim O'Neill also mentioned to Japan's decreasing savings rate. He should know that money just circulates society. Remember those money spent by elder people ends up to Japanese banks which have always been the main purchasers of JGB.

Think JGB's situation as follows. You are a big brother borrowing some money from your little sister. You are not comfortable with that, but it's a domestic problem, and you should be able to manage the situation.

About half of US Treasuries and UK Gilt are owned by foreigners. That's much more dangerous than Japan's situation. You may be borrowing money from gangs.

poydras's picture

Let's compare who may be worse.

Japan's international net assets 2008: 44% of GDP; USA: -18%

Japan's aggregate debt to GDP: 283% (Note that Japan peaked at 345%; private debt has dropped dramatically while public debt has expanded); USA >350%

Japan's trade surplus in 2008 was $88B; USA $673B deficit

Another factor to consider when comparing countries is inflation. In Japan, they have mild deflation. There is inflation everywhere else.

I am bit confused as to where why there is such focus on Japan when the US fundamentals are so much worse. I have difficulty visualizing how we make it through the year. I welcome any counterpoints.

Anonymous's picture

You are absolutely right.

Thinking in balance sheet is of critical importance. In the report, there is a confusion on Japan's balance sheet and Japanese government's balance sheet.

Checking Japan's current account, you will find that it has almost always been black. The closer look tells you that it is a combination of Germany's balance sheet and Switzerland's. She makes money from exporting high tech goods, and investing that money all over the world. Last year, her balance sheet was like rather Switzerland's than Germany's. As a result, Japan as a country has been number one in the list of net asset countries 16 years in a row.

Do you really think world's No 1 net asset country will default? If so, how?

Check the new paper of Reinhart & Rogoff.
http://www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=460
In this paper, Reinhart and Rogoff write that Japan's external "gross" debt is much smaller than other countries including U.S.

About 95% of JGB is owned by Japanese. Although Japan is a rapidly aging society, that has nothing to do with her banks' ability to buy JGB. Elder people will save less and spend more. But, the money spent by elder people comes to merchant or shops and then ends up Japan's banks which have to buy JGB, because there is no other safe investment vehicle than JGB in deflationary Japan. Money does not disappear, but circulates society.

Think Japanese government's situation as follows. You are a big brother borrowing some money from your little sister. You are not comfortable with that, but it's a domestic problem, and you should be able to manage the situation as long as you know how to sooth your sister.

About half of US Treasuries and UK Gilt are owned by foreigners. That's much more dangerous than Japan's situation. You may be borrowing money from gangs.

Anonymous's picture

Scary. 35% of revenues as debt service. And that's with horribly low rates. And an aging population who receive no interest on cash balances, and who must dip into principal to buy rice and sake and manga. And a non-battle tested PM and Finance Minister who are naive enough to think they can cozy up to China, a country who happens to remember Nanking 1937, but will smile while picking Japan's pocket. And a political bigwig behind the scenes (Ichiro Ozawa) whose agenda is heavily anti-Western and not necessarily in the country's best interest. National sepuku might be the only alternative.

Anonymous's picture

The japanese are thinking long term, they understand that the american empire's days are numbered. Why submit to China kicking and screaming? The current power structure might want to build up a cozy relationship with China, so that when day comes for Japan to formally become a puppet state of china, they can receive preferential treatment or so they hope.