Saturday, January 29, 2011

It's Not Just Egypt: Japan Is Headed for the Brink

The headline sounds relatively innocuous: "Japan Credit Rating Cut by S&P on Absence of Strategy to Curb Debt Levels". However, the ramifications are anything but.

Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden.

Azusa Kota, a Tokyo economist, hopes the flailing Japanese government gets the message, going on record with a dire warning: "...they have absolutely no sense of crisis. Once bond yields spike and the fire is lit, the amount needed to finance Japan’s borrowing needs is going to jump and it’s going to be too late."

Mike Shedlock describes the complications arising noiselessly, yet urgently, for the Japanese government.

The key to understanding the urgency now is the warning from Finance Minister Yoshihiko Noda that Japan's debt burden has risen to a point where Japan can’t rely on bond sales to cover revenue shortfalls...

Japan has reached the point where its [retiring] savers need to draw down their savings in retirement, and thus need to sell Japanese government bonds, not buy them...

...However, the Japanese government has squandered those savings (and 100% more of GDP as well) building bridges to nowhere [while] fighting deflation.

Nations often default on foreign debt, but this is debt the government owes the Japanese people...

...Should [their] interest rates rise to a mere 3% or so, interest on Japan's national debt will consume most of its revenue.

This mess shows the foolishness of using Keynesian and Monetarist stimulus to defeat deflation. [Ed: Yes, this means you, Paul Krugman, you liberal nutcase.] Neither worked...

...Now Japan is left with an enormous debt problem and no way to solve it.

So what's the concern for us? Why do I mention this troubling little incident in some far off corner of the world? I mention it because Japan is one of the United States' biggest bankers -- holding a huge chunk of our debt.

As our government attempts to "roll" its own debt (refinance our gargantuan loan obligations), it should become clear that some of our major, current holders of Treasuries -- Japan, Egypt, Ireland to name just a few -- will probably lack the necessary wherewithal or the appetite for risk to re-up.

Which, for those of you uninterested in economics, translates roughly to, "Oh, s***."

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