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What Does Japan’s Implosion Mean For the Rest of Us?

Standard & Poor’s is threatening to cut Japan’s credit rating, which doesn’t sound like that big a deal in a world where no one’s credit is quite what it used to be. But Japan is a special case. It’s been borrowing like crazy at rates two or so percentage points below what the U.S. pays on 30-year Treasuries. And it intends to further ramp up its borrowing to keep the economy from falling back into deflation.

A lot of people think this is a really bad plan:

It is Japan We Should Be Worrying About, Not America, and A Global Fiasco is Brewing in Japan, by Telegraph’s Ambrose Evans-Pritchard

Debt Issues by economist Paul Kasriel

No Way Out for Japan, by blogger Mike Shedlock

The gist of the argument is that Japan is heading for a “debt trap,” which will unfold as follows: When its pool of domestic savings runs out (as it will in the coming year) the Japanese government will be forced to borrow from foreign investors, who will doubt its ability to pay and demand a higher interest rate. As billions in short term paper roll over at ever-higher rates, interest costs will rise, requiring even more borrowing, which causes investors to demand even higher rates, and so on, until it dawns on the markets that this is a self-reinforcing cycle. Buyers scatter, rates spike, the economy crashes, game over.

Japan, with its ageing population, massive government debt, and anemic growth rate, appears to be headed this way sooner rather than later. This is clearly bad for the people who depend on, say, a government pension or interest on government bonds, which includes most of Japan’s population. But what does it mean for the rest of us?

There are three possibilities, one relatively benign, two not:

1) The “strong” currencies like the dollar, euro and yuan actually benefit as global capital hides from the storm produced by the implosion of the world’s second or third largest economy. The cost of goods imported from Japan goes down, which is bad for specific competing companies but good for overall inflation. The markets are volatile for a while but life goes on, with easy money more or less balancing debt destruction.

2) Once Japan goes, all bets are off, literally. This isn’t Greece, with its miniscule share of Euro-Zone GDP. If a global powerhouse can spend and borrow itself into bankruptcy, the logical thing to ask is who else can do it. Which countries are travelling the road that leads to a debt trap, running up huge debts and financing them with short-term paper? When that list is compiled it will be seen to include the U.S. and most of the Euro-Zone. The cost of credit insurance will soar and interest rates will rise, which will choke off risk-taking in the financial markets, sending stock and commodity markets back to their 2008 lows and beyond. Governments will ramp up the printing presses but this time they’ll fail because no one wants to borrow, even at zero percent. Cash is king, the dollar, euro and gold are hoarded, and we’re back in the 1930s.

3) The world’s central banks see Japan’s implosion coming and preemptively start buying up assets with newly-created paper. An unlimited printing press trumps a huge but finite debt collapse, and we enter the first-ever global hyperinflation.

Scenarios 2 and 3 are a bit apocalyptic, but the numbers justify the speculation. We’ve never been here before, not by a long shot, and the bigger the imbalance the more serious the consequence. Everyone sees Japan coming…the question is, will it matter?

14 thoughts on "What Does Japan’s Implosion Mean For the Rest of Us?"

  1. There is just not enough money to go around to support the US and Japan–the end game is near…..Once again the wealthy elite has lost control just as in the 30’s–it is not an accident that Volker wants another Glass-Steagall like policy–they just cant call it that cause they will not take responsibility for their rape of the middle and working classes.

  2. Jen,
    We’re concerned about the rest of the world because we need to keep the $ Ponzi Scheme alive if the Empire is going to stand. We need the rest of the world to use the $ or everything comes tumbling down..We’re a Nation that is backed by a print press, that is backed by Oil, which is maintained via the barrel of a gun.

    If China or Japan stops accumulating $’s or decides they’re going to use a substantial amount of $’s we see high inflation and possible Hyper. If they stop buying our treasuries the Fed must step up and we will see Severe Inflation and more than likely hyper-inflation. If our treasuries are not purchased and we can no longer maintain our Military presence Oil will begin to be traded and purchased in different currencies and commodities. Once we lose the Oil backing we lose our Empire.

    This is when we can get back on track. We can cut out the social spending and we can grow our manufacturing base. Recovery is not possible without the collapse of the $..it would be Political suicide.

    The Military is at war to keep the $ on top..no need to thank the troops. Demand that the Politicians bring them home! That would do much more good. I spent over two years out there. It’s time everyone else left.

  3. Some charts would really make this into a very compelling article. What about japan’s Debt:GDP, and Japan’s borrowing rates, overlaid atop each other? Thanks.

  4. Frankly…Why are we (United States) so concerned about other countries financial problems. Lets worry about how poor other countries are, how much debt they are in, what crisis they’ll be in the next 5-10 years…Ha! What about our own country. Our goverment is so busy sticking thier noses in other countries business that leave out the most important thing “The Unites States Crisis, potentially the next depression”. I am 25 years old, and loosing confidence in our government way of governing. We need to take more focus into our own Financial pitfalls. Look at it from my point of view:

    1. Take away the High dependicies on manufacturers and imports from Foreign countries (ie;China). Though it might sound harsh, considering the almost slavish job ethics. This would be a chance for the United States to be more self reliant and endure less debt. This in turn would create more jobs, which decrease the roughly 43,000,000 Million Unemplyed in the US (http://www.usdebtclock.org/). Who knows coming from me, mi-nute, this could increase the almighty value of the U.S dollar. Seriously it is rediculous.

    2. There is one article a coworker shared with me I find interesting (http://globaleconomicanalysis.blogspot.com), I agree with this person, “The only thing that can possibly work is the writeoff of bad debts, something both the administration and the Fed are reluctant to do. We can either do this now, or drag it out for two decades like Japan, only to end up deeper in debt.” Mike Shedlock.

    The Partial Spending freeze that will be discussed on Pres. Obama’s State of Union speech tommorrow, is going to be preposterous, anyone heard of what happened 1937. Hmm…lessons not learned….I have just enough life experience to know at such a young age that it seriously impossible “To spend’s one’s way out of a debt crisis.

    More to come on my opinion, I have to get back to work, I am immesly greatful to still have a job….at least for now….

    Let me leave you on this last note:
    Know this, if we do hit the great depression, what is going to happen to the U.S? The Citizens? Families (Unemployed)? Future Generations (Hell, we are going to have less educated in our future generations because everyone/states/governments thinks a good place to start trimming the costs is by laying off teacher/professors) Not Smart….I think we should start by cutting some Salaries in the Hundred Thousands/Millions/Billion salaries these higher officials are making, and or bonusing themselves? Wouldn’t you agree 🙂

    What recovered us from the last depression, WWII, thats not my idea of a recovery, heck, we are at war now and all its doing is creating more debt! (God bless all those who are fighting over there for us, and Thank you). Come on… I think I have a realistic perspective for resolve of our crisis…and what you read here is just a small percentage of what should be done…..more to come in future blogs!

  5. First of all, I doubt the “debt trap” scenario will play out as described. Besides the dynamics changing in unpredictable ways right at the get go, I doubt foreign investors will even start to lend money to Japan via bond purchases. Would you? If Japan’s solvency has gone from bad to worse in the last 20 years how could it improve by taking on more debt? After all that has gone down recently, if foreign investors are still so greedy and pragmatic to essentially sell more drugs to an addict then they deserve what they (don’t) get.
    Another thought: Since Japan’s debt to GDP ratio is now about 167% and it’s still standing – in fact we’re all talking about lending Japan even more money – maybe the US actually has a long way to go before having any problems, having a debt ratio of only about 70%.

  6. If Japan falls into a depression, what will they do with their $1,000,000,000,000? To juice their economy and protect their currency, they well spend it. They will use it to buy commodities and yen on the global market. A trillion dollars can buy a lot of bridges to nowhere and a lot of yen to postpone hyperinflation.

    If Japan looks like it is going down, use any bump in the dollar as a chance to exit. The trade, debt, currency, and military relationship between Japan and the US will ensure that they both go down together. Both countries will be forced to back their currencies with gold eventually, but probably at more than $10,000 or 1,000,000 yen to the ounce.

  7. Even though Japan’s debt already looks impossible to shift, we’re supposed to believe is manageable because it is largely domestically held . . . it is not in hock to foreigners.

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