Debt outpacing growth and the case of Japan
Japan couldn't trick its way out of an economic meltdown, and neither can the US.
A man places Japanese Yen on a counter to exchange for U.S. dollar at an exchange booth in Tokyo in this file photo. Bonner argues that like Japan, the US will not be able to trick its way out of paying its debts.
Kim Kyung-Hoon/Reuters/File
Get out your chopsticks! Brush up on your sushi! Learn to read backwards and upside down!
Yes鈥e鈥檙e going to Japan!
The gist of the Japanese situation is this:
The bubble burst in 1990. But rather than let their big businesses go belly up, the Japanese used every trick in the book. Counter-cyclical deficits up the Shinanho. ZIRP (zero interest rate policy). And QE too.
The economy didn鈥檛 grow. It didn鈥檛 collapse. It just got stuck鈥ike a moth in amber. No new jobs. No new output. And get this, Japan is expected to lose 40% of its working age population by 2050.
But Japan is a leader, not a follower. Over the next 40 years, Germany will lose more than 30% of its working age population too. Russia and Poland will lose even more.
Growth is expected to be negligible over the next 40 years in Japan. But it will be almost nothing in many other countries too, according to an HSBC report. It estimates that the US will grow at around 1.5% annually. France 1.1%. Denmark, Norway, Sweden 鈥� barely anything at all.
What does this sound like to you, dear reader? It sounds like the whole developed world going Japan鈥檚 way 鈥� with low growth and high debts from here to eternity.
As in Japan, so in Europe and America. The European Central Bank is lending the banks as much as they want 鈥� at low rates. The Fed has its own ZIRP鈥hich it says it will keep in place until 2014.
Growth is stalled鈥ebts are mounting up. Hello Tokyo!
But wait鈥ere鈥檚 the Congressional Budget Office telling us that Congress will have those deficits under control in no time.
鈥淒eficits to fall sharply, US forecast says,鈥� reports the International Herald Tribune.
What a relief that is! The CBO has crunched the numbers. It has beaten up the 2s. It has punched out the 5s. It has pounded the 6s. And now, finally, like prisoners at Guantanamo, the numbers tell us what we want to hear.
US debt is going down!
Wait a minute鈥re these the same number crunchers who, at the beginning of the 21st century, forecast federal surpluses as far as the eye could see?
Yes, it is!
But, okay, that didn鈥檛 work out exactly as planned. They crunched the numbers but then the numbers got un-crunched on their own. Damned numbers! You just can鈥檛 trust them.
So, how can we trust these numbers?
That鈥檚 just it, dear reader, we can鈥檛. In order to work out as planned, they require:
1. Congress has to let the Bush tax cuts expire on schedule. Hmmm鈥� Will that happen? Beats us. It probably depends on who wins the elections in November鈥hich probably depends on what the economy does between now and then鈥hich probably depends on more things than we can begin to estimate and compute.
But the central idea of it 鈥� that Congress will act responsibly 鈥� seems like something you can鈥檛 say with a straight face. Will pandas stop eating bamboo? Will teenagers stop slouching? Will liquor stores make free home deliveries? Nope. Everything has a nature of its own. And the nature of Congress is to spend money it doesn鈥檛 have on things it doesn鈥檛 need. And then to push the bill onto the next Congress鈥he next administration and the next generation.
2. Not only do taxes have to go up, so does economic growth. There鈥檚 a problem right there. According to prevailing theories, if you increase taxes during a de-leveraging spell, you don鈥檛 get faster rates of GDP growth. You get slower growth.
The CBO acknowledges this problem, to a degree. It allows as how unemployment may go up, thanks to the tax increases. In fact, they say it will go to 9% in 2013.
How will the President, Congress and the Fed react to rising unemployment? Mightn鈥檛 it tempt them to engage in a little more counter-cyclical stimulus鈥t the expense of the tax cuts?
And what happens to growth rates? The CBO figures that growth can outstrip deficits. Maybe. Maybe not. Now, it鈥檚 not even close. There鈥檚 a $1.1 trillion deficit this year. Growth? Maybe a fifth of that. In other words, debt is growing 5 times faster than the economy.
During Mr. Obama鈥檚 first (and maybe last) term, US debt will grow by more than $5 trillion. Another term like that and we鈥檒l be over $20 trillion.
And already the weight of debt is pressing down growth rates鈥nd it鈥檚 getting worse.
And if HSBC is right, US growth will be very slow. Will deficits also be very low? Below 1.5% of GDP? Down from over $1 for the last 4 years to under $225 billion for the next 40?
Heck, we鈥檙e as soft-headed as anyone. We鈥檇 like to see the whole problem go away too. And maybe it will鈥�
But we wouldn鈥檛 bet on it鈥�
Bill Bonner
听蹿辞谤 The Daily Reckoning