A Huge Pension Plan Headed for Bankruptcy

The Dow jumped another 195 points on Friday. What do you think? Was that because the economy is so healthy? Are stock market investors looking for years of healthy earnings growth ahead? Did buying the Dow at today’s valuations suddenly become a reasonable investment move?

Or could it be because Japan has just done something monumentally absurd? It is hard to know what attitude to take when talking about Japanese financial policies. Mockery? Pity? Gratitude?

It is easy to mock the Japanese. They have a government debt-to-GDP ratio of 250% – the highest in the world. And year after year – for a quarter of a century – they “stimulate” their economy with QE and deficits.

What do they get for it? Mostly more debt. Stock and housing prices are still just about one-third of what they were 25 years ago. They missed the big dot-com boom of the late 1990s. Then they missed the real estate and finance boom of 2003-07.

Meanwhile, Japan’s celebrated trade surplus is disappearing. And her people are getting old, retiring and dying. Japan has become a huge pension plan headed for bankruptcy.


1-japan-balance-of-tradeJapan’s trade balance – after switching off its nuclear power stations in the wake of the Fukushima disaster, Japan’s trade surplus has turned into a deficit (the current account looks better due to the country’s large foreign investments, but has begun to deteriorate as well) – click to enlarge.


A Desperate Nation

It is easy to pity the Japanese, too. Most of their wounds may be self-inflicted. Still, they live in tiny houses… with a standard of living the rest of the developed world holds in contempt. And they’ve suffered two and a half decades of on-again off-again deflation.

They’ve tried everything to get out of this slump – stimulus deficits, zero interest rates, quantitative easing. They’ve tried everything, that is, except the one thing that would work!

Not surprisingly, things have gotten worse. In September, real household income fell at a 6% rate. Between 2013 and 2015, it’s expected to fall by almost 10%. And now the Japanese are desperate.

That is where the gratitude comes in. Americans and Europeans should thank them for having shown us what not to do – for proving, if it needed proving, that you can’t fight a debt crisis with more credit. More important, they’re showing what happens to Bismarck’s social welfare economy when you run out of young people, growth and credit.

Now, it’s time to double our gratitude. Because now the Japanese are showing us that even a world-class economy can do something worthy of a banana republic. Already, for every 40 cents the Japanese government collects in revenue, it spends a dollar or more. Total debt – government and private – is near the highest in the world: at about six times GDP.

Tokyo is running out of time… and money. So, the Bank of Japan finances the government. It buys 70% of the issuance of Japanese government bonds. Last week, it announced that it would buy 85%. Japan is going to show us that you don’t have to be a Third World kleptocracy – such as Zimbabwe – to undertake extraordinary and disastrous policies.


2-Japan spending vs revenuesThis slightly dated chart shows the situation as of 2011 – the gap between tax revenues and spending has grown ever larger. Spending has flattened out somewhat in 2013-2014, but the budget deficit reached a new high as a percentage of GDP in 2013, so one can infer that the gap has continued to widen – click to enlarge.



Since 2008, Japan’s tax revenue has even failed to cover so-called non-discretionary spending – click to enlarge.


QE Goes into Hyper-Drive

Thank you, Japan! Let us say a prayer for the Japanese and learn from your example!vYes, just 48 hours after the end of QE in the US, the Bank of Japan announced the most absurdly audacious QE plan in history. It’s jacking up QE to $750 billion in asset purchases – both bonds and stocks – a year.

Adjusted to the size of the Japanese economy, that’s the equivalent of QE of about $3 trillion a year in the US. Anticipating a flood of new cash, stocks rose around the world. Coincidence? Lucky timing for Yellen & Co.?

It is almost as though central bankers got together in advance and planned it that way. QE stops in the US; the Japanese put it into hyper-drive. Stocks rise in both countries. All is well. The Nikkei 225, faithfully recording the hopes and dreams of Japanese investors, leaped 5% on the news. The Dow followed suit.

Foreign investors – no dopes – figured out that there was money to be made in a revival of the old Japanese “carry trade.” They can borrow in Japan – at some of the lowest interest rates ever recorded on the planet.

Then what to do with the money? Hey, why not carry it over to the only world economy still growing at a decent rate: the US?


4-japan-government-budget-deficitJapan’s annual budget deficit as a percentage of GDP – in 2014 is has begun to contract for the first time after 5 years of increases – click to enlarge.


5-NikkeiAfter the BoJ’s “even more QE” announcement, the heavily shorted Japanese stock market has jumped by about 1,350 points in just 2 trading days – click to enlarge.


Charts by: Tradingeconomics, Japan ministry of finance, BigCharts, SocGen


The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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