On the worthlessness of Japanese government debt
Not much action in the markets.
So, how鈥檚 our 鈥渢rade of the decade鈥� doing?
We haven鈥檛 checked. But we think we鈥檙e onto something. Remember the trade? Buy Japanese small cap stocks and sell Japanese government bonds.
Okay鈥� So it鈥檚 not that easy to do. It鈥檚 just an idea鈥 concept鈥� It鈥檚 meant to get us thinking about how things work.
In the present case, the Japanese have the biggest public debt in the world 鈥� at 200% of GDP. Already, they鈥檙e using almost 60% of their tax revenues just to pay the interest on the debt. How do they pay government expenses? They borrow more money!
This is not a healthy situation for the holders of Japanese Government Bonds (JGBs). They鈥檝e got to expect that sometime in the next ten years the government is going to run out of money鈥r investors will run out of confidence鈥nd interest rates will rise. When they do, bond prices will fall鈥robably collapse鈥nd JGB holders will lose beaucoup yen.
There is no way that this crazy system of government finance can continue. The only reason it has come this far is that Japanese savers have no idea of what is going on. They鈥檝e been saving for their retirements. And now, they are retiring in record numbers. Japan went over the demographic hump in 2002. Now, its population is falling. And there are more people retiring than there are entering the workforce. These retirees don鈥檛 realize that the government has taken their retirement savings and spent the money. They think it is waiting for them, ready to finance their golden years.
They鈥檙e in for a shock. And so are investors, when they finally realize that those JGBs are worthless.
贬别谤别鈥檚 Bloomberg with more on the story:
Japan鈥檚 top government spokesman said the country鈥檚 fiscal situation is 鈥渁pproaching the edge of a cliff,鈥� underscoring Prime Minister Naoto Kan鈥檚 call for a national debate on raising the 5 percent sales tax.
Kan is 鈥渆xpressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,鈥� Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. 鈥淭he supporting fiscal conditions don鈥檛 allow for any delays, it鈥檚 finally approaching the edge of a cliff.鈥�
The prime minister last night said in an interview with TV Asahi that he would 鈥渟take [his] political life鈥� on addressing Japan鈥檚 rising social welfare costs and increasing public debt. The day before he said 鈥渘ow is the time鈥� to face these problems.
Japan鈥檚 public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, both estimates the highest among countries tracked by the Organization for Economic Cooperation and Development, according to the group鈥檚 forecasts.
Now, let鈥檚 imagine that we鈥檙e right about this. Let鈥檚 imagine that governments can鈥檛 really run deficits forever鈥o matter how cooperative the population. They reach a point when the go 鈥渙ver the cliff,鈥� as Japan is about to do.
If that鈥檚 so鈥�
鈥ell鈥here is the US in this story?
Stay tuned鈥�
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