Saturday, May 01, 2010

The Smart Money ain't on Japan

....Smart Money is looking at Japan as the next short because its debt is 100% of GDP, and it will be more difficult to refinance as the population gets older and may need to spend its savings, rather than buy more poorly yielding securities. The cost of shorting Japanese government debt is cheap as interest rates are so low... Forbes

For what it's worth.We've been hearing these sorts of things about Japan, the US and everywhere else for a gadzillion years now. "It can't go on! We can't continue to borrow and borrow and borrow!" But we do.

But if the above occurs sometime in the distant future, what will happen to the US when its one of its two major financiers goes belly up? Will China be able take up all the slack? US taxpayers certainly won't.


  1. I do *not* think the following is accurate, but something *like* this *probably* is:

    America prior to the Reagan years really looked like the situation was dire. Then you had two major events. First Paul Volker came in at the Federal Reserve and drove up interest rates to an incredibly high rate. This threw America into a serious recession right at the beginning of Reagan's term. This finally helped clean up the system a bit, causing a lot of waste to get cleared from the system.

    Yet what helped more than this was a new policy of externalizing debt. I don't think it was ever a formal agreement, but clearly it became expected that if Japan was going to continue to ship to America, they needed to finance America's debt burden.

    America's crisis was resolved.

    Then you had the fall of the Soviet empire ... another boon for America, and a boost for its bonds, enabling it to extend its finances further.

    Then during the Clinton years, the baby boomer reached their maximum earning potential, and you actually began to get surpluses on the current deficit. (Ross Perot who had done so much to get people to focus on the deficit problem actually had predicted this.)

    Then China came in and began to pick up the slack.

    You had a massive dot com bubble in the early 2000, which was papered over with cash, and this lead to the mortgage crisis, which was again papered over in cash. If you look at the books at the Federal Reserve they are bizarre. (And we are only legally allowed to see the vague outline of it.)

    What's really been going on is we are working on the mother of all bubbles which will be America debt. And when this bubble bursts, there will be a new world order, only it might not be the one we like.

    An impoverished America with nothing but its powerful military and with loads of anti-terrorism laws that have revoked numerous rights, combined with an suddenly impoverished and agitated populous fueled by (not entirely unreasonable) antigovernment rhetoric doesn't exactly create a pretty picture in my minds. Google Marc Faber at YouTube, he'll tell you what's coming.

    Although I doubt they are that smart, I guess what the elites hope is that they can just drag the economy through the drudges for a long enough time (half a centruy) to clean up their books and paper over their problems. But I doubt that this will work.

    As far as I can tell, Japanese elites depend on America for their stranglehold over Japan, so they will go down with the ship so to speak, supporting America to the bitter end.

  2. That sounds a lot more realistic than some of the stuff I've heard recently, including from Paul Krugman.