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Anatomy Of A Failing State: Japan's Budgetary Nightmare
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Once the global economy rolls over into contraction, the tide will recede and Japan's fiscal and monetary bankruptcy will become painfully apparent.
What do you get after 25 years of stagnation and Keynesian Cargo Cult monetary stimulus? A failing state, that's what. The intellectually bankrupt ruling Elites of Japan have no solution for Japan's slow stagnation, as real reform would diminish their wealth and power.
So their only "solution" is to double-down on monetary stimulus: flood the enfeebled Japanese economy with more credit and fiscal stimulus, a.k.a. building bridges to nowhere: Japan's Monetary Pearl Harbor.
But reality isn't as immobile as failed policies. While Japan's ruling Elites fiddled away the past 25 years propping up sclerotic cartels and phantom loans, Japan's population has aged and its primary sources of wealth creation have atrophied.
We can see these trends in Japan's national budget. Before we dig into the numbers, we need to note that Japan's Ministry of Finance routinely announces an austerity budget for the next fiscal year around 92-95 trillion yen (TY), and then supplemental spending during the fiscal year pushes actual expenditures up to 100 TY.
According to Highlights of the Budget for FY2013/2014, the initial 2013 budget was 92 trillion yen, while the actual 2013 spending came in 10 trillion yen higher, at 102 trillion yen.
According to Japan's government looks to trim budget deficit, the national budget has hovered around 100 trillion yen for years.
So we have to take these 2013 spending estimates as lowball estimates that are 5%-10% below actual spending.
REVENUES: 92.6 trillion yen
Tax revenues: 43.0 TY
Other revenues: 4.0 TY
Other revenues: 4.0 TY
Government Bond Issues (borrowing): 42.8 TY
EXPENDITURES: 92.6 TY
National Debt Service (interest & bond redemptions): 22.2 TY
Social Security: 29.1 TY
Other: 41.2 TY
Debt service and Social Security are 120% of tax revenues. In other words, tax revenues don't even cover debt service and Social Security.
An astonishing 46% of the governments budget is borrowed money. Even with near-zero yields on Japanese government bonds (about 1%), 51% of tax revenues in 2013 were spent on national debt service.
The 2014 increase in the national consumption tax rate from 5% to 8% is expected to raise an additional 6 trillion yen of revenue in 2014, but that remains to be confirmed. If history is any guide, increases in national consumption taxes (a.k.a. value-added taxes or VAT) fail to generate the expected windfall of additional revenue, as consumers spend less.
Since Japan's GDP fell an astounding 6.8% after the tax increase took effect in April, it seems likely the revenues will disappoint official expectations.
Even if this new revenue comes in as expected, the amount being borrowed to fund government spending will only drop a modest amount, from 42.8 trillion yen to 41.2 trillion yen. Yee-haw.
Meanwhile, national debt service is expected to rise from 22.2 trillion yen to 23.2 TY.
It's difficult to see the tax increase as a panacea, as borrowing barely declines and debt service costs actually increase.
For context, we need to look at Japan's tax revenues, borrowing and spending over the past decade. Only then can we see why Japan is a failing state: tax revenues are as stagnant as the real economy, while spending rises as Japan's population of retirees soars.
In the decade since 2005, tax revenues actually declined slightly while annual borrowing increased by 8 trillion yen and expenditures rose by 10 TY. Virtually all of this increased spending comes from higher Social Security costs, which rose from 20 TY to 30 TY as the demographics of Japan's aging population inexorably pushes retirement and healthcare costs up.
You see what's happening: tax revenues are unchanged while interest and Social Security costs keep rising. A relatively modest increase in the consumption tax triggered a major meltdown in Japan's gross domestic product, and the planned increases in this tax from 8% to 10% are attracting criticism: Next consumption tax raise painting Abe into a corner.
If it turns out that the tax hike generates little additional revenue, Japan's path to failed-state will be set: a stagnant economy generating stagnant tax revenues, a central state that funds half its spending with new debt, and rapidly rising social welfare and debt service costs that are already consuming all the tax revenue and then some.
Can Japan continue down this path indefinitely? Many believe the answer is "yes," but we cannot base the next 10 years on the previous 25 years. Since Japan's financial bubble popped in 1989, the Internet and China greatly boosted global growth, enabling Japan to live off its well-oiled export and debt machinery.
But the engines of global growth have reached diminishing returns, and a prolonged global recession looms just ahead. Playing games such as devaluing Japan's currency and monetizing Japan's ballooning debts with freshly issued money does nothing to fix the rot beneath the bright neon lights of superficial wealth.
Once the global economy rolls over into contraction, the tide will recede and Japan's fiscal and monetary bankruptcy will become painfully apparent.
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"The future is too bright to keep your eyes fully open!"
Signed a Japanese Hermaphrodite...not because of Fukushima.
RIPS
Long way from that book that Japanese fellah wrote back in the '70's stating unequivocally that the Japanese were undefeatable
Pride cometh before the fall.
But at least we're just exceptional
Long top-heavy surface combatants and potassium iodide pills
AS the underwater pig farmer says - I'm gonna make it up on volume!
An astonishing 46% of the governments budget is borrowed money.
At some point you people need to realize earth is not borrowing from other planets.
I thought I never saw a country comitt national suicide like Japan was until Nov 2008 and the mongoloid Democrats and liberals plus the oligarchs selected Obola and the Wookie.
Democrat and liberal voters really are vile scum.
46% explains why they keep raising taxes at exactly the wrong time. When it crosses 50%, with the BoJ buying it, the currency will tank. They are at the cliff's edge.
Japan will be fine. They are Too Big To Fail.
Listen.
Soon these "COUNTRIES" will be competing for well "QUALIFIED" immigrants.
Polish your resumes and stay ready.
Seems like they are borrowing to give money to local governments. That makes sense since the federal government can borrow chesper. They are in balance except for that.
Nice summary. Nearly all of their debt is internal, so I think they will start to monetize portions of it soon.
That will further impoverish the population, and lead to an inflationary spiral, but the alternative is for the banks to take massive losses, and we all know that can NEVER be allowed to happen.
that bond service number is outrageous. i failed to see why japan pays anything more than a token 0.01% on any of their bonds. the revenue side from loans is fine but paying interest expenditures for nothing is just plain stupid.
Thought another way, what does a reset really mean?
Do the people with paid-off houses keep them? Is the debt on recently acquired mortgage debt forgiven?
Is credit card debt forgiven?
Are so-called ‘obligations’ like social security contracts and pension schemes vaporized or left intact?
Do the shopkeepers just keep the inventory and start the books at zero?
Are bank accounts converted to the new currency?
Will we each of us be handed $1,500 in the new currency and that’s that – like Monopoly, go!
No one knows, but a simplest case for Japan only involves government debt. Government bonds held by the Central bank are paid off with new "printed" money, and everything goes on as before, except that savers take a massive hit. The value of their currency is devalued in rough proportion to the amount of the new money printed.
Moving their pension funds out of bonds and into equities makes me think they are setting up for exactly that.
As to what it might look like in the States...., sabe dios.
Pookie
I'll take a shot...
First assume a hyperinflationary collapse ...ultimately all fiat systems have ended that way.
Next read about all the HI collapses, Weimar and Zimbabwe are a good start but the Soviet Satellites, Argentina, Bolivia or one of the dozens of others will do.
Picture a huge pile of the 'old' billion dollar notes piling up in the gutter...they have been replaced by the new trillion dollar notes. Scoop those up and pay off your debts. Bread is now $10T a loaf so sell your iPad or your daughter for enough to get some and wait for complete collapse of the currency.
If you can still afford gas your car may be useful...unless you leased it in which case you could not afford to buy it at the end of the lease.
You paid off your mortgage when you sold your old Fender so you still have a place to live.
If all your savings were in gold, go to the local black market guy, cash some out, buy that neighbor's Buggati and his daughter....you are good to go...and don't get huffy about the selling of kids...old saying from 1923 Weimar...'better a whore in the bedroom that a dead baby in the crib'...smile, it has to get better soon...doesn't it?
The French tried to make it 'fair' by allocating debt based upon the new value of currency but that effort failed...so forget about them getting every last drop from you (they saw this coming way before you did so don't worry about their well being) ...and HELL NO you do not get any of the new currency for free...you nuts?
oh, your entitlements will continue long after the amount you get each month is less than the cost of the stamp that was used to mail it...ask the widows of Weimar.
Another ZH'er posted something his 105 year old uncle or relative mentioned either from 1929 or an earlier US currency failure, because it has happened before.
He said govt workers like postal people got paid in money while the avg person got paid in worthless script. The postal workers bought up houses and farms for peanuts. So assuming all this fails - unless voters go hang their county elected govt people then you are still paying property taxes. If you have no money - tough shit. You lose your house and these vermin will take it from you.
Don't sell the Fender!
it was a Squire
I wonder what their fat-lady is singing?!
I'm long Chinese language schools in Japan.
An American, not US subject.
"What is the first thing a Japanese person learns in Chinese? 'I'm sorry'."
USDJPY = 300 coming soon; how else do you ever even come close to repaying hundreds of trillions in Yen debt without making that debt worthless? Short answer - you don't.
www.traderzoo.mobi
Basically they're funding half the government through the inflation tax, which is taken from savers. Eventually the value savers have stored asymptotically approaches zero and it's just plain old hyperinflation.
I think we all know how this ends. The side effects of the end are what's really interesting.
Per capita the people of Japan have the highest savings rates anywhere in the world.
The Japanese Post Office JPO retains savers deposits totalling more than the entire Japanese banking system.
The Japanese government are relying upon Mr.& Mrs. Japanese Bloggs to continue lodging whatever saving they have in to entities like the JPO.
seek
you're right ...in the end the money becomes worthless...it is hyperinflation one way or the other...
Deflationists believe they will support the currency until the last few dollar will buy you everything you need...that is just not the way it ever happens unless you are in a gold standard.
You know, Japan's demographics would be perfectly suited to this new economy. Fewer jobs, but they could could just work part-time as older folk, and business would get the benefit of all that experience. It wasn't all that long ago that Japan was kicking ass economically. Those people are much older now, but they still have it. (Just not a lot of it, hence the part time idea..)
And in Japan, it's not like they'd be taking too much from the younger generation. Those kids are much smaller in number. Japan is a country that NEEDS to tap the potential of its older workers. Before they all die out anyway.
Hey, my idea is just as good as Abenomics, and has the added benefit of not being proven a complete and total failure...
Their youngsters aren't marrying 'cause it was already(for 10 years) too expensive.
Japan should donate to "the chosen ones", whoever that might be.
Olympus scandal
Yamaichi Securities scandal
Sanwa Bank scandal
Jusen scandals.
Most of the Prefectures (local regions) of Japan are deep in debt.
When Japan goes over the falls, the U.S. will follow right behind into the wormhole.
Putin is going to mock us by rubbing leaves on his girlfriend’s who-who.
As it all goes to hell fun will still be had... fuck all you GoPro haters, here are the streets of Japan
http://youtu.be/s0MDY9fl-IA
"I walk the streets of Japan, till I get lost". Pretty cool vid, but why put all that bling and lighty light shit on a Lamborghini. I mean its a fucking Lamborghini, it don't need no blingy bling lighty neon shit, NONE.
The article totally fails to address the core of Japan's problem... demographics. Japan's population peaked and is now in decline. The working age population is declining even faster than the overall population. Socialist entitlement programs, aka "social security", can't remain solvent with a declining population. (Nor really even with a stable population) The math just doesn't work. Someone needs to bravely tell Japan's populus this, then make massive cuts to the entitlement state, and right size the budget to reality. That won't happen of course, because that would remove the illusion of prosperity.
Japan isn't alone, all modern western countries are in the same boat. It's just that Japan got their first thanks to theirn near lowest in the world propensity to breed.
What Shitzo and Kuroda are doing to the Japanese sheeple is a lot worserrerr than what the USSA did to them towards the end of the war and what the USSA did to the Japanese people towards the end of the war was fucking awful.
Here are some facts that few seem to know:
1. Japan Post Holdings is the largest financial institution in the world ($3.8 trillion). This is about 40% of total U S bank deposits. Most of their assets are in JGB's. 2. GPIF is the largest retirement fund in the world and they currently own mostly JGB's but are in the process of shifting to 40% JGB's and the balance in foreign bonds, stocks, domestic stocks, Corporate bonds, REITS and ETF's. 3. Japanese banks hold deposits more than double the United States (over $20 trillion) and some 31.7%* of those assets are in JGB's. Insurance companies are large and have over half their assets in JGB's*. 4. The deficit in Japan has been running some 50% of total spending They are borrowing all the money to run the government if you leave out social security and interest. The Sales Tax increase may get them down to borrowing 45%. 5. Interest uses up 27%* of total government revenues. Inflation equals higher interest rates sometime. The only exit on this path is a ruined currency and hyper inflation. 6. The central bank is printing some 960 trillion ($870 B) yen per year at the new rate. Do you want to hold onto these new yen. * per Dylan Grice's article
The fact is that Japan has wasted the wealth and savings of an industrious and frugal people trying to follow Keynesian advice to stimulate their economy and it did not work. QE has been on and off since 2001 and it is now QE 8, 9 or 10. Abenomics was a hail mary pass trying the ultimate experiment that has greatly increased Japan's risks. If they are successful with 2% inflation, interest will likely be 3% and 75% of government revenue will then be absorbed with interest. This is exactly the wrong direction to solve their problems. The finances are bad enough but it is the demographics that seals their fate.
"Please, do not worry."
Amen.
An excellent post.
If it's too dire to imagine it can't happen :)
In 20 years at least half the population of Japan will have life threatening cancer thanks to Fukushima. In 50 years, Japan as a country will no longer exist.
Japanese who know when to go short and when to go long are doing just fine. Doom is way over-rated.
If they knew when to hold and fold, they wouldn't keep their savings there! That's the doomy part.
This is the model for the EU, USA and others. They have NO solution, but will drag it out for a few years longer as they get to hold on to power and money and influence during that time.
They have no fix, they are just reacting.
It won't end as well for the USA, America has no savings and no circular private savings>bond market>monetisation flowchart. In the USA it will be confiscation of pensions and such.
Legalized confiscation of private assets + Invasion of few "rogue countries" and seizing whatever like the mongol hordes of Genghis Khan = Solution to USA's future problems.
They have been doing that already but the problem is, its still not enough.
The world has not enough left to offer to fill that ever growing hole.
They have just finished off their domestic economy. Its finished....they will be struggling just to make ends meet.
Dometic demand will plunge, tax receipts likewise.....inflation scream due to a weak weak Yen once trade and GDP figures start to roll in........
Holding Yen will be like holding a babies nappy.
The US will have to print to buy trillions of Yen.....
The US will have to print to buy trillions of Yen.....
And that is what has been and will sustain Japan, until it wont.
Get rid of the "Cargo Cult"