Turning Japanese? Turning Japanese? I really do think so.

That's why I'm turning Japanese
I think I'm turning Japanese
I really think so

I know I cannot be the first to use this analogy, but god bless new wave music & the 80's, for this apropos song. 

With so much attention being paid to the Eurozone, specifically Greece’s departure from it and 165% debt to GDP ratio in tote, its surprising to me that nobody in the MSM mentions the king of living beyond its means. This is none other than the spawn of American ingenuity and the benchmark that all post-war reconstructions whom are modeled after… Japan.

Japan’s ascension from rubble after WW2 to the world's third-largest economy has been staggering, especially for a country that’s about the size of the state of Montana. With a population that values education as much as anyone in the world, Japan has become a standard to many and no more than those in the corporate world, noted for their dedication to innovation and organization. But if you dig a little deeper, Japan and with all its glitz, glam & refined style; it isn’t all what it seems.

Because, like all fiat facilitated economies, the debt monster is alive and well and the only way to keep from getting swallowed up is to keep pushing, keep innovating and never, ever under any circumstance become stagnant. Well, at least over the last 20 years or so that’s been the case.

This is precisely what happened to Japan in the 1990’s known in Japan and around the world as Japan’s “lost decade”. When the NIKKEI started to free fall and real estate prices started to fall with it, those asset bubbles burst. This left the government in panic mode, so like all bureaucracies do in a panic, they did the opposite of what was right and did what was easy - threw money at it, instead of letting the natural correction run its course. 

They began to doll out stimulus after stimulus (sound familiar?), bailed out banks and insurance companies (getting warmer?) with the economy still limping along they said the hell with it and raised its consumption tax 2 percent (doesn’t this sound familiar too?) which subsequently brought on another recession.

After about two decades, and even with stimulus’s keep piling on, Japan’s economy finds itself in a ditch. Since 2011, the Bank of Japan has issued quantitative easing programs in excess of 900 billion alone. With very little to no growth potential, an aging population and an exponentially escalating debt tab; Japan is running on borrowed time. 

 

In a recent interview with Spiegel Online's Anne Seith, The Bank of Japan's governor, Masaaki Shirakawa said: "At the moment, the effect of our monetary policy in stimulating economic growth is very limited. The money is there, liquidity is abundant, interest rates are very low -- and, still, firms do not make use of accommodative financial conditions, the return on investment is too low."

Doesn't this sound eerily similar as well? 

Japan is currently using 25% of its outlays just to service their debt. If they raise interest rates, the number will climb dramatically. This is why the US is so fearful of raising its interests rates well. The FED wont entertain raising interest rates until 2014, so imagine all the cheap money printed off until then? If we are to raise interest rates where we already pay 220 billion on basically 0% what will it look like if those rates go up? As I pointed out back in March, via Kyle Bass, for every additional percentage point it will also bring about $140 Billion dollars on top of the existing 220 Billion.

  President's FY 2013 budget, Congressional Budget Office

Japan’s current debt to GDP ratio is currently 220% according to IMF reports for comparison’s sake the US debt to GDP ratio is about 102% (but that number has doubled in just four years). Japan however, unlike the US, has a few unique circumstances that will either prolong a slow death or escalate to their death at the speed of sound. 

Graph: zerohedge.com

Japan is one of the few countries that its public finances most of its debt (an astounding 95%). Thus, if they are comfortable with virtually no return on their investing (0.75% average return) into the debt and increasing inflation, they can literally keep financing their own debt as long as they don’t mind saving up to go to the grocery store as if it were a vacation.

The other option(s) is eye popping and absolutely lunacy to say the least. Newly elected Prime Minister Shinzo Abe wants the Bank of Japan to start issuing “unlimited easing” starting with a 120 billion dollar bullet into infrastructure. If that doesn’t get inflation where he sees fit and despite a declining Yen the threats coming out of Shinzo Abe’s mouth, will bring the death of Japan sooner rather than later.

In true, ancient Japanese kamikaze fashion, the Liberal Democrat Shinzo Abe with all his love for easing (hello Bernanke) is threatening to change the country’s laws and actually take the Bank of Japan over: read quite literally, socialization.  

So, as you can see, here in the US by all accounts, we are not Japanese yet. Although if we keep up this pace, follow the Japanese playbook and we look at the last four years as any indication; it should tell you it’s only a matter of time before we do.  

Blue, white... and red? Is the US on the same path of Greece?

With Greece out on the corner whoring for another bailout and Standard and Poor yesterday lowering Greece’s credit rating to CCC (the lowest in the world) joining Moodys, who dropped Greece two weeks ago… it’s a great time to reflect. Or fittingly enough hold up a mirror to ourselves. Could the mighty US ever be in the same mess the Greeks find themselves in now? They are socialists you say and we’re capitalists, surly that couldn’t happen. Or Could it?

The Greek GDP is 329 Billion (2009). Obviously its not Rwanda. But let’s put that into perspective. The 2009 revenue of Wal-Mart was over 400 Billion. Wal-Marts annual revenue surpassed 174 nations that year. And being Wal Mart is just one company in the US, it gives you a feel for how truly large and powerful we are. So much so, that the US GDP is nearly three times its nearest competitor standing at 14.2 Trillion.

What separates the US from Greece? Sure we collectively output 45X in a year then they do collectively, but our external debt to GDP ratio is 100% on the nose as of tonight’s check. What we have that Greece don’t have is simple. We have a printing press. Our currency is traded throughout the world as the default currency. All we have to do is print our recovery (at the expense of massive inflation of course amongst other undesirables). The Greeks have to rely on a bailout from the European Union or default and declare bankruptcy. In many ways bankruptcy isn’t a bad thing for Greece. Because the sooner they can weed out mal-investment, waste and become more efficient the sooner they can get started in rebuilding. We on the other hand are so disillusioned our reckoning is going to be a lot slower and much much more painful.

So Greece having to default on its debt is one thing, for us to do it… that surly would send a ripple effect throughout the world. And that’s where the conversation truly ends. That’s where you get into raising the debt ceiling. Because after all, its not just the Chinese holding debt, its average Americans too. We can stick it to those red chinamen… but we refuse to and won’t default on Grandma Sherley. I mean, Standard & Poor's may be forced to take away our AAA credit rating, or what basically what amounts to as being a credit card with no limit!

At the current rate, in a few months we will start to default on our debt. The disease of debt and living beyond our means at a national level are over. The diagnosis isn’t going to change. The treatment is the only choice we have. Take the medicine now by choice, or be forced to do it later. And we have two responsible options to do this now and one irresponsible one that will only make things worse.

We can default on our debts and admit to the world and to ourselves that we are living well beyond our means or raise taxes and pay our way. If our 2011 budget deficit is 1.6 Trillion and we have roughly 160 million working Americans, all we will need is 10g per working American to cover this years shortcoming (hows that for stimulating the economy, suck 1.6 trillion out of citizens hands and into the coffers of out of control and out of touch government).

Or we can do what what politicians always are in favor of doing, and that is to let the next guy worry about it and continue to kick the can down the road, raise the debt ceiling, creating an oncoming tsunami at what point could be a country in total chaos. Lets see what kind of chutzpah these elected “leaders” have the rest of this summer. Based on past results, i dont think the shoe business should need a bailout.