¥1,086,000,000,000,000 (Quadrillion) In Debt And Rising, And WhyThe ¥ Will Soon Be A $: "A Lost Decade... Or Two"
Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?
From Bloomberg's Brusuelas:
The Long Malaise: Similarities Between Japan And The US
Slowly and surely, comparisons between the long malaise in Japan and the historically weak expansion in the U.S. are growing more valid.
These similarities primarily relate to the unique problems following the piercing of a debt-financed asset bubble that left many households, banks and firms with liabilities that exceeded assets following the bursting of a residential asset bubble. Unless policy is put in place soon or unless home prices are allowed to adjust to equilibrium clear-ing levels, it is growing more likely that the U.S. economy will continue to underperform in a fashion eerily similar to that of Japan over the past two decades. While differences between the U.S. and Japanese economies are many – the conspicuous consumption practiced by American consumers versus the thriftier Japanese public, for example – the similarities between the two economies are many. The direction of long-term yields and of the housing sector, as well as the increasingly leveraged U.S. balance sheet, look all too similar to Japan following the piercing of that country’s housing and equity market bubbles.
Peak to trough, home prices are down 33 percent. The Japanese housing market did not experience appreciable pricing gains during the first two decades of recovery, not exactly a comforting thought for either home owners or policy makers. A comparison between Japan and the U.S. housing markets in the four years following the bursting of their respective housing bubbles shows the two markets headed down the same listless path.
From the viewpoint of policy makers, the floundering housing market is blocking the process through which accommodative financial conditions stoke economic growth. This is likely why the Fed is considering purchasing mortgage-backed securities. It is also why PresidentObama, in his State of the Union address, expressed the desire to create a refinancing program that would support even the refinancing of mortgages not owned or guaranteed by Fannie Mae and Freddie Mac.
Meanwhile, the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so. This makes it difficult for policy makers to push forward fiscal solutions to the housing problem, especially given private investor concern over the sovereign debt crisis in the euro zone.
Since the onset of the recession in the U.S., the economy has grown above the long-term trend of 2.7 percent in only three of 16 quarters, averaging a scant 0.16 percent rate of growth. This is very similar to the 0.5 percent average level of growth in Japan between 1991-2000. If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two. Until a solution is put forward that addresses the shadow inventory of homes and permits prices to adjust, policy makers are just spinning their wheels, engaging in stop-gap measures that will probably prove insufficient to solve the most vexing of problems.
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