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Why Japan at 200%+ Debt to GDP Is In Much Better Shape Than Much Of Indebted Europe
In response to the post “Japanese Downgrade Illustrates Potential Paths To Contagion”, several
readers have suggested that the Pan-European sovereign debt issue may
be overblown since Japan has been moving along for over 20 years and its
debt to GDP is twice that of my of the troubled EU nations. I want to
shed a little light on this topic. To begin with, it is not so much the
aggregate debt-to-GDP levels that should cause alarm, but the delta of
said levels (to be discussed in my next post on the topic). Even when
looking at the aggregate debt/GDP levels, one must take a look at the
actual debt in question.
Public Debt-to-GDP
Japan, Greece, Italy, Belgium, Ireland, and Canada have some of the
largest public sector debt in relation to GDP. Japan, Greece and Italy
have public sector debt-to-GDP topping over 100% versus 68% for Euro
zone and 31% and 27% for Asia and Emerging markets, respectively.
In Japan, a near-term disruption in the government bond market
remains unlikely as a result of stable domestic savings rates and
healthy current account surplus. More importantly, Japan has one of the
lowest concentrations of foreign sources funding (refer to the chart
above) while Greece, Belgium, Portugal, Austria, Italy, Ireland, France
and Netherlands have high exposure towards foreign funding.
Total Reserves less Gold-to-GDP
The nations covered in our Pan-European Sovereign Debt Crisis series
also have significantly less reserves to serve as a cushion against
shocks. Greece, U.S, Ireland, Portugal, Spain, Luxemburg and EU region
at its entirety, all have total reserves excluding Gold below 2.5% of
GDP compared with 39% for Asia and 31% for Emerging markets, and 15%
against the world average.
With instability cropping up in the Middle East, there is just
another reason to speculate as to when the charade in Europe will be
exposed. We have our ideas who will be first. Reference First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? and Tracing The Path Of Egypt’s Disruption Sending Contagion To The Stronger Countries Of Europe and Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!!.
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Reggie,
Would you consider directing some of your financial detective work towards the average american. By treating the average american as a company.Taking into account average mortgage, average pay etc etc.
I think it would be an interesting excercise to see where the breaking point would be.
"where the breaking point would be."
don't you mean where the breaking point was?
but that aside, I agree it would be an interesting excercize.
Reggie.. perhaps you should take a closer look at the GOLD on the ECB balancesheet.. marked to market every quarter...
You are missing the big picture on the euro...
the dork of cork seems to have understood the story of the euro.. thanks to FOFOA
Just because I understand some of it - it does not mean I like it , the masters of the euro have ultimate power.
If they do not expand their balance sheet soon - a massive industrial collapse will result - making physical Euro cash very valuable.
I do not think they will do this however but it is a option especially if nations display no resistance.
I think FOA and FOFOA are wrong, but A was onto something ten years ago as the developed world successfully drove down the gold price but learned their lesson after the margin call from hell forced the brits to sell their gold.
If the FOFOA thesis were correct we would see some confirmation in changes in the ECB balance sheet like you suggested, but it is doubtful we will see it and the ECB is likely to maintain a balance sheet with little excess expansion and inflation. The idea of a master plot from a cabal of old world bankers and Arabs/Asians is very farfetched. Bankers make more money with a flexible debt based money supply. That's why they keep promoting it.
hello laddie
i'm going to give you a call for a round of golf - there's this new course called GlenGoldman - its been built on this stunning landscape. There's an old trout river going through it although you dont see so many these days.....
;D
Sorry BigDuke6 but I hate Golf , no offence but I think it is a good walk wasted , however fishing is a different sport entirely.
In fact one of my favourite fishing spots is no longer available because of a obscene golf course and its private access rights - maybe thats why I dislike the sport.
DoC you are missing the fun of golfing. Gather up a bunch of your buddies, bring plenty of beer and rent the golf carts. There s nothing funnier than 20 idiots tearing up the greens, crashing into each other and getting thrown off a golf course.
Nahh - my fun entails going into the wilds with a backpack or more accurately semi - wild in Europe and clearing my head of all this financial nonsense.
The "Japan situation" is not analagous to any of the EU countries.
I'm with Poydras vis-a-vis there are "...countries in a far worse condition." - the U.S. for instance?
That's the major train wreck to come. There we have all the negatives of Japan (e.g. zombie banks, chronic high unemployment, moribund economy, the central bank monetizing gov. debt) sans sufficient (any?) reserves, trade surplus, healthy personal savings rate, coherent fiscal policy, etc.
A global de-coupling from the US $, loss of its reserve currency status would be THE domino. Further commodity px. inflation thanks to BB's bubble blowing and perhaps the rest of the world is eventually going to catch on.
America's largest export - waste paper...
"U.S. for instance?"
Japan's trade surplus is about $6B per month on top of the large, foreign investment earnings.
The US has to print money to pay for the extraordinary twin deficits. And then you have these curious purchasers of Treasuries. Maybe Chewco UK, Chewco Canada, ...
Japan may take the devaluation route. Perhaps the better alternative is to renegotiate with their own peoples.
Japan has at least a few options to avoid any implosion. They could tax foreign holdings at a higher rate to begin with.
The devaluation approach is effective when you owe money externally and you have a trade deficit.
AEP should focus on other problem countries such as his own. Maybe he can explain how one year Gilts have an effective yield under -3%.
You like observing japan? i have this from AEP in his predictions for 2010.
didn't happen... but this year??
'The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1 per cent from a captive bond market, and seemed such a good idea at the time.
Every auction of Japanese Government bonds will be a news event as the public debt punches above 225 per cent of GDP.
Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom.
By then China, too, will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while but only at the price of an asset bubble. Beijing must hit the brakes this year or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-08.'
He's dour - i like him.
see ya around.
the question is why is it important which one is worse, when both are interconnected, and one going down will pull down other one as well?
The Gold button is becoming more attractive to the ECB I imagine , although they could just keep their balance sheet at 2 trillion and watch epic bank runs live on television.
I am just not sure where their decision will fall - epic debt destruction via deposit burning or destruction of debt via a huge Gold rise on their balance sheet.
It's not just 'foreign exposure' that's a problem for the PIIGlets...it's exposure to each other's sov debt.
Run. Do not walk.
oups, double dip! I pass this one!
By the way your figure for France seems very high. As France is very Colbertist, and its savings rates are much higher than in UK which is Totally washed out debt wise.
It is remarkable that a majority fail to appreciate the huge positives of Japan. They do indeed have a serious issue. It is a self funded issue however. Japan has a high, positive NIIP and a chronic trade surplus. Countries with high aggregate debt/GDP levels, large negative NIIP, and chronic traded deficits are in a far worse situation.
I like that, "chronic trade surplus".... if only we could be so chronically disabled. What is it, 33 years, since we last had that distinction?
Reggie Middleton I'm sure your a better jazz player than a financial expert. Good try anyway.
x
indeed. X marks the spot.
junk...
so it doesnt matter that japan prints more than 100% of tax revenues per year?
so it doesnt matter that japan must rollover bonds equals 60% gdp each and every year..??
last one,, some assholes like Rosie think USA gonna have +20 years of japan style defaltion... dream on..
USA printed %10 of gdp for last 3 eyars.. so we just behind japan hy couple years..
alx
I don't recall reading anywhere that "it doesnt matter". Do you? The premise is that many of the more highly indebted European nations have a bigger problem.
I would only argue with your headline, Reggie. Japan isn't in "better" shape, it's in a different variety of bad shape. Japan does not have that risk of foreign flight from its debt markets. However, it does allocate too large of a share of its GDP to nonproductive interest on its debt, and its citizenry have too large a share of their savings in the from of claims against future tax collections, which ultimately come out of their own collective pockets.
The US has basically the same issue with Social Security and Medicare. Nominally, these "save" contributions in trust funds. But de facto, they are just reallocations of wealth from the working to the retired. And as the ratio of retired to working increases, this becomes harder to bear. Not only is Japan way ahead of the US in that aging trend, but it also has nominally private savings diverted into a similar system that merely reallocates wealth from savers to dissavers, without ever having invested it in anything productive that paid real returns. A Japanese family's personal savings accounts and private pension plan are largely lent on by the bank to the government. It's a slow motion train wreck waiting to happen.
Japan has suffered from 20 years of simmering deflation with stocks still unrecovered down over 30%. I hate to bet against Reggie but in this instance I think once the West begins to implode in similar fashion Japan will follow suit. I agree high foreign debt is a very good gauge for a countries weakness. But Japan is still suffering from weak businesses, zombie Corps propped up by the State for decades. When the crunch comes these weak financial institutions will implode (not 20 years before time either!) and Japans savers will panic pulling their money out making matters worse. It's about time Japan learnt the hard way State intervention in markets is a recipe for slow death