A Global Fiasco Is Brewing in Japan

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Recently
by Ambrose Evans-Pritchard: America
Slides Deeper Into Depression as Wall Street Revels

 

 
 

I have felt
rather lonely after suggesting in my New Year Predictions that Japan
is dangerously close to blowing up on its sovereign debts
, with
consequences that will be felt across the world.

My intended
point – overly condensed – was that 2010 will prove to
be the year that Japan flips from deflation to something very different:
the beginnings of debt monetization by a terrified central bank
that will ultimately spin out of control, perhaps crossing into
hyperinflation by the middle of the decade.

So it is nice
to have some company: first from PIMCO’s Paul McCulley, who
said that the Bank of Japan should buy “unlimited amounts”
of long-term government debt (JGBs) to lift the country out of a
“deflationary liquidity trap” and raise the souffle again.

His point is
different from mine, in that he discerns deflation “as far
as the eye can see”. But in a sense it is the same point. Once
a country embarks on such policies, the game is nearly up. The IMF
says Japan’s gross public debt will reach 227pc of GDP this
year. This is compounding at ever faster speeds towards 250pc by
mid-decade.

The only reason
why this has not yet blown up is because investors (mostly Japanese)
have not yet had the leap in imagination required to understand
their predicament, and act on it. That roughly is the argument of
Dylan Grice from Societe Generale in his latest Popular Delusions
note released today. “A global fiasco is brewing in Japan.”

Japan’s
deficits are already within the hyperinflation “red flag”
zone identified by historian Peter Bernholz (“Monetary
Regimes and Inflation
” .. the Bible on this subject). As
you can see from the charts below, prices start to spiral into the
stratosphere once the deficits as a share of government expenditure
rises above a third and stays there for several years.

The Bernholz
range for the five hyperinflations of France, Germany, Poland, Brazil,
and Bolivia over the centuries is surprisingly wide, from 33pc to
91pc. Japan has been in the that range almost continuously for the
last eight years. The US joined the party in 2009. Japan’s
Bernholz index will rise above 50pc this year for the first time,
meaning that it will have to borrow more from the bond markets than
raises in tax revenue. You see the problem.

Read
the rest of the article

January
13, 2010

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