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so You'll Thrive and Profit, In Spite of It... "

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Debt Makes You Dumb, Japanese Edition

Debt works the same way for countries as for families and individuals. That is, if you borrow too much, your life begins to suck. And actions that in normal times might have seemed unwise, contradictory or downright stupid begin to look better than the (even more disturbing) alternatives.

Pretend, for example, that you are Japan. You borrow huge amounts of money year after year to keep the zombie banks and builders created by an early-1990s asset bubble from imploding and decimating the rest of the economy. Your annual deficits are huge, your accumulated debt, as a percentage of GDP, dwarfs that of any other major country. And your population is aging rapidly, so you have at best a decade to start generating massive surpluses to pay retirees what they’ve been promised.

So you elect a president who bullies the central bank into creating enough new currency to boost economic growth and inflate away a big part of your debt. It works, sort of. The yen’s exchange rate falls immediately, just as you hoped it would, thus boosting exports. And though you worry that such an aggressive “currency war” strategy involves some risk, it feels good to be doing something.

But those deficits keep rising, which, government statisticians calculate, will increase the national debt at a rate that more than offsets the inflationary effects of easy money. So you’re not actually fixing anything. You’re just causing the savings of a whole generation to evaporate as the value of their government bonds plunge along with the currency.

How do you respond to that? Well obviously, say your leading economists, you raise taxes to lower the government’s deficit. You agree, and on April 1 boost the national sales tax by an amount sufficient, other things being equal, to take a serious bite out of the deficit.

Alas, higher taxes tend to slow economic growth, which pretty much offsets the central bank stimulus. So you find yourself even worse off than before. Not only have your aggressive, innovative policies failed, but everyone now realizes that 1) you never had the slightest idea what you were doing and 2) there’s nothing left to try in any event.

Then your people start behaving as people always do when they realize that their leaders are clueless and that events will henceforth progress according to the laws of nature and physics rather than politics: they buy gold.

Japanese Prepare For “Abenomics Failure”, Scramble To Buy Physical Gold

As we reported yesterday, the world’s most clueless prime minister, Japan’s Shinzo Abe, has suddenly found himself in a “no way out” situation, with inflation for most items suddenly soaring (courtesy of exported deflation slamming Europe), without a matched increase in wages as reflected in the “surprising” tumble in household spending, which dropped 2.5% on expectations of a 0.1% increase in the month ahead of Japan’s infamous sales tax hike. How does one explain this unwillingness by the public to buy worthless trinkets and non-durable goods and services ahead of an imminent price surge? Simple – while the government may have no options now, the same cannot be said of its citizens who have lived next to China long enough to know precisely what to do when faced with runaway inflation, and enjoying the added benefit of a collapsing currency courtesy of Kuroda’s “wealth effect.”That something is to buy gold, of course, lots of it.

According to the FT, “Tanaka Kikinzoku Jewelry, a precious metals specialist, reported that sales of gold ingots across seven of its shops are up more than 500% this month. At the company’s flagship store in Ginza on Thursday, people queued for up to three hours to buy 500g bars worth about Y2.3m ($22,500). March has been the busiest month in Tanaka’s 120-year history.”

Of course, while the Japanese consumers know what is the best defense against runaway inflation and purchasing power destruction, the government also knows that just like in India, where massive gold imports to satisfy local demand so skewed the current account deficit that India spent most of 2013 imposing gold capital controls, it simply needs to make gold purchases impossible in order to redirect spending into more Keynes-approved products and services.

However, for now Japan is happy just to crush its population’s meager disposable income with soaring energy prices. Which also means the locals can allocate their personal capital in the most efficient way: one which discounts a very unpleasant future.

Investors are being drawn to the metal not just because of higher taxes, said Itsuo Toshima, an adviser to pension funds.“Slowly and steadily, people are preparing for the worst, which is the failure of Abenomics.” “To protect the value of wealth, gold comes into play as an inflation hedge, and if the economy goes back to deflationary circumstances then, again, money seeking safe havens would flow into gold.”

This post is the first in a series that will show the same process at work in every major country: Too much debt leads to increasingly-contradictory and irrational policies that, because they appear to be purposeful, lull the local populace into temporary complacency. But when the policies are revealed to be not only ineffective but self-negating and therefore really dumb, mass-disillusion sets in. Then the real fun begins, at least for precious metals dealers.

16 thoughts on "Debt Makes You Dumb, Japanese Edition"

  1. Debt may make you dumb, but forgetfulness may make you dumb too, which could explain why one gets into debt in the first place.

    As I’ve said before, I think one of the main problems or “flaws” of the human experience is the amount of time it takes between actions and their consequences. Generally speaking, at least at mass levels, things take too long to develop. There are two main political consequences of that: Poor policies can be adopted because their known, negative consequences will not manifest for at least a few decades, and people are unable to learn from the past because they simply can’t remember the root causes of their present reality.

    For all the criticisms of the various economic, fiscal, and monetary policies throughout the world in reaction to the latest financial crisis of 2008, the really negative consequences that have been expected by some have yet to occur. Japan may have unprecedented debt-to-GDP but it hasn’t mattered yet, and it’s still conjecture that it ever will. Europe has been a basket case of socialist/liberal/entitlement policies for as long as adults over 50 can remember, and yet it still staggers on, replete with all the vestiges of b.s. grandeur. The US is also full of it, but it keeps muddling along too.

    Frankly, I hope to live to see most countries hit the wall financially, and I’d especially like to see the financial and political elites of the world get absolutely pancaked in one way or another.

  2. The three previous central banks of the United States collapsed. The fourth one, The federal reserve system inevitably will also collapse.

    In the chaotic past, the industrialized nations of the world went through phases of disruptive inflation often exceeding 1000% per year. That served a purpose in helping to destroy public faith in their existing national governments. It softened them up
    and made them more willing to accept drastic changes in their life styles and their political institutions. It paved the way to The New World Order. But now we have arrived, and extreme inflation rates—at least in the absence ofwar—would cause public dissatisfaction and be counterproductive. Inflation, therefore, has now been
    institu­tionalized at about 5% per year. That has been determined to be the optimum level for generating then most revenue without causing public alarm. Five per cent, everyone agrees, is “moderate.” We can live with that, but we tend to forget it is 5% per year, forever.

    A 5% devaluation applies, not only to the money earned this year, but to all that is left over from previous years. At the end of the first year, the original dollar is worth 95 cents. At the end of the second year, it is reduced again by 5% leaving its worth at 90 cents, and so on. After 20 years, the government will have confiscated 64% of every dollar we saved at the beginning of our careers. After working 45 years, the hidden tax on those first-yeardollars will be 90%. The government will take virtually all of them over our lifetime. Current income and earned interest will partially offset this effect but it will not alter the underlying reality of government confiscation.

    EFFECT OF”MODEST” 5% INFLATION

    For the past
    fifty years, all the published charts illustrating the decline of the dollar from
    such-and-such a date to the “present” show the following type of
    curve. 64% each 20 year generation, 90% each 45 working years, total confiscation over life time.

  3. In ’04-’08 (5yrs) the US ran a $3.47 T trade deficit (http://www.tradingeconomics.com/united-states/balance-of-trade) vs. an increase in treasury debt ownership of $1.4 T foreign…$2+T of dollars not getting recycled

    In ’09-’13 (5yrs) US ran a 2.45T trade deficit vs. $2.8 T increase in foreign treasury purchases…$400 B more dollars “recycled” than US created in trade deficits???

    US Current account is still negative but best since ’00 after bottoming in ’06

    Japan
    Jan ’08 – Japan owned $585 B in US treasury’s
    Jan ’14 – Japan owns $1.2 T in US Treasury’s
    +$615 B

    Japans consistently ran trade surplus’ peaking in ’07 but beginning in ’08 began running trade deficits and has subsequently collapsed to an all time deficit in Jan ’14 (http://www.tradingeconomics.com/japan/balance-of-trade). Same true for current account (http://www.tradingeconomics.com/japan/current-account)

    However, since ’08 Japan has massively increased their recycling of US dollars into Treasuries while having far fewer dollars to recycle….paradox? How did Japan come up with an extra $600 B in US $’s to more than double their Treasury holdings while simultaneously suffering a nuclear energy collapse requiring far greater energy imports…imports of oil and gas necessitating payment in petro-dollars? Where do all the $’s to buy both T’s and oil come from???

    China
    Jan ’08 – China owned $493 B in US treasury’s
    Jan ’14 – China owns $1.27 T
    +$777 B

    China ran large trade surplus’ (http://www.tradingeconomics.com/china/balance-of-trade) (except for their annual lunar new year plunges) but has had positive yet shrinking current account surplus since ’08.

    Purchased 5,000 tons of gold @ $1500 = $240 B

    Belgium (US’s 3rd largest creditor…WTF)
    Jan ’08 – Belgium owned $13 B in US treasury’s
    Jan ’14 – Belgium owns $310 B
    +$297 B

    Since ’00 and continuing since ’08 Belgium has run a small trade surplus (http://www.tradingeconomics.com/belgium/balance-of-trade) of approx. 10 B/yr Euro’s and a current account deficit (http://www.tradingeconomics.com/belgium/current-account).

  4. I teach AP Macro and this is an AWESOME article for my students to read. We are talking about how fiscal and monetary policy lead to GDP, inflation, and unemployment changes. I am always trying to wake them up and this a wonderful piece to help them see the ridiculousness of modern econ. I am printing this and turning it into a class activity. THANKS!!!!

  5. This is a good article. Oh the tangled web keynesians weave…. Funny how Richard Duncan, recognizing the fact that our fiat ponzi scheme requires steady credit growth, advocates for spending $ trillions on renewables and new technology. I guess he believes that the depression that will occur when credit collapses will be so painful that the prudent choice is to spend even more money we don’t have. Of course, there is no math to support any notion that said $ trillions in new spending will lead to high enough growth that the extra taxes on economic activity will offset the new spending. Also, he points to Japan as having debt to GDP of 250% and says we can do that. But in Japan, people and institutions invested in JGBs for cultural reasons and becasue they had deflation which made low interest ok when you factor in negative inflation. The US already has the fed buying 70% of treasury bonds even with higher interest rates. Doubling the debt would almost assure that 100% of debt is financed by the fed, banana republic style. And what happens to the velocity of money when people lose confidence in a currency? Can you say Weimar?

    1. Yes we can say that. We can also say intentional as the logical course to this nation perishing from this earth, a new world order of totalitarianism and hi tech feudalism. Collapse is the only solution possible since default will result permitting the debt to disappear.This has been a very will planned and executed abandonment of the constitution and bill of rights and a transfer of the total ownership of the planet to one percent of the population of the earth about 7 million people leaving out 6,993,000,000

  6. its funny, the way our press would for years lambaste japan for making stupid “economic” choices. Now in the light of our own recent stupid economic choices it appears that Japan never really had a choice. Think about it, they are the floating aircraft carrier for the united states in the pacific. If they had been allowed to liquidate their debt like our holy economic textbooks suggest, i’m certain they would no longer be a reliable part of the empire. The same as if we had taken the medicine we so often prescribe to others. Had we liquidated the “rich” of our country and the largest banks, we too would no longer have empire. sigh….. the trappings of power

    1. Everyone always has a choice whether to government to make themselves wealthy by moving the wealth away from those that have a little of it which is shared between them ,but no more than proportionately to population size. Government corrupts and absolute government corrupts absolutely. That is way our for fathers

      created the constitution and the the declaration of independence and the right to bear arms to protect ourselves from the corruption before it grew out of control as it now has, The declaration provided early awakening which we bypassed.The truth has always been defeated by tyranny until people become willing to step forward and put their lives into the battle.The future will belong not to ideas,but to people who act upon those ideas.The government that used to belong to us is working in a unified and diligent manner to accompish its goals for their country

  7. Very intelligent and entertaining article that helps explain Japan’s perpetual malaise. Thanks!

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