Keep a wary economic eye on Japan

The tottering Japanese economy is shaping up to be a bellwether for the world economy as a whole.  John Mauldin has published a series of articles about it that summarize recent developments better than anything I’ve read in the mainstream press.  In chronological order, they are:

  1. All Japan, All the Time
  2. The Mother of All Painted-In Corners
  3. Central Bankers Gone Wild
  4. Banzai! Banzai! Banzai!

In each case, follow the link to read the beginning of the article, then click the ‘Download’ button to either read online, or download to your computer, an Adobe Acrobat document in .PDF format of the entire article.  They’re worth reading.

In the latest article, Mr. Mauldin says the following:

For the last three weeks, I have been making what I personally think is a rather strong case that the Japanese have embarked on what may be simultaneously the most outrageous, intriguing, and desperate monetary policy experiment by a major economic power in history.  The Japanese are rapidly coming to their own Endgame, the end of their ability to borrow money at interest rates that are economically rational. If interest rates on Japanese bonds rise to a mere 2.2%, 80% of tax revenues will go just to pay the interest on their debt. At a 245% debt-to-GDP ratio, they are in desperate straits, and they know it. And desperate times call for desperate measures.

To get to where they want to go, to grow their way out of their deflationary problem, the Japanese need both inflation and real growth. Real growth can come from massively increased exports, and inflation can even come from an increase in export prices. Both results can be obtained by weakening the yen. As I have shown, they need to devalue the yen by 15-20% a year for many years in order to break through to the other side.

. . .

I truly do feel sorry for retirees in Japan. I am reminded of that wonderful Japanese movie from the ’50s, The Ballad of Narayama. It depicted ubasute … a custom allegedly practiced in Japan in the distant past, whereby an infirm or elderly relative was carried up a mountain or to some other remote, desolate place and left there to die.

While not as straightforward, the last 20 years of policy choices are producing results that are going to feel to the elderly as if they have been abandoned.

There’s much more at the link.  Bold, underlined text is my emphasis.  Sobering reading.

The reason I highlighted that last sentence is that what we’re seeing in Japan right now is coming to the USA and Europe as well.  It’s as inevitable as sunrise or sunset, because we’re basically following the same path, fiscally speaking, that Japan has done over the past few decades.  They’re anywhere from ten to twenty years ahead of us, depending on which country(ies) we’re talking about.  Consider:

  • The US government is deliberately devaluing the dollar, just as Japan is deliberately devaluing the yen.
  • Our debt levels, whilst still far lower than Japan’s catastrophic numbers, are climbing higher and higher with no sign whatsoever that our politicians can or will do anything to rein them in.
  • Just as Japan’s older population is going to find government support (i.e. programs equivalent to Social Security, Medicare, etc.) diminishing, either through cuts in the actual amounts or through inflation destroying the value of the benefit, so ours is too.  Already the ‘official’ rate of inflation is deliberately under-calculated, so that benefits indexed to inflation are not keeping pace with the actual rise in prices experienced by those receiving them.  That’s going to get worse as we go along.

Like I said . . . Japan is a bellwether for the rest of the world economy.  Pay attention, and prepare accordingly.


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