Japan and the debt event-horizon

I have been saying for a while now, (Lesson in Pain and Lies, In Trouble, Jump First, and Debt Madness)  I think Japan is the wild card that could wreak every one’s picnic.

Not so long ago Prime Minister Kan said he thought Japan was at risk of collapse under the weight of its massive debts.  He was talking seriously about cutting debt levels and seemed to be considering trying something other than the tried and failed policy of the last two decades.

Within weeks his leadership was challenged and though Kan survived he has learnt his lesson. So today he, like those obedient politicians before him, is now watching as his government engages in another in Japan’s twenty year line of doomed and shameful attempts to deny their debts and print their way out of recession.

And the result so far, after two interventions, is that they are failing more rapidly and more expensively than ever before.  The latest move this week was for the Bank of Japan to LOWER its overnight rate DOWN from 0.1%! The Bank also released 5 Trillion Yen for buying up governments bonds (using printed up money to buy their debt or QE) and ‘other assets’ (corporate debts).  Another BIG push to lower the value of the Yen against the dollar. It lasted FOUR HOURS.  Then the Yen was back up.

Japan has, I think, quietly crossed a critical event horizon.  In their case it is a debt and deflation event. The thing about event horizons is that they are invisible, but once crossed not even light can get back out.  Gravity, or in Japan’s case, debt,  takes over and nothing in this universe can escape its all crushing embrace.

Debt like gravity is easy to ignore in normal life.  You don’t feel its effect except if you fall over.  No one feels endangered by the gravitational pull of passing cars or other people, though there is a measurable force.  BUT should you create a vast and compact enough mass, then gravity starts to pull rank over all other, normally more important forces.

Debt is the same.  At normal levels growth out-guns debt. But pile enough debt together and it’s gravitational pull starts to become self re-enforcing.  It starts to pull more debt towards itself. Once you get to that state hiding it in a draw, or behind steel vault doors or in the deepest darkest pit you can dig WON’T WORK. It just sucks in more stuff, turning turning anything it gets a grip on, productive efforts included, into more debt and ruin.  Everything around it that gets to close.

This is where Japan is now.

Japan is, and perhaps as importantly, is now seen as being, in a debt spiral, on the wrong side of a horizon they can no longer get back from.

For twenty years Japan has been aware of a massive debt black hole in its finances.  Arrogance and cowardice conspired to make them try to hide the debt-hole rather than honestly deal with it. So Japan has sought to hide this hole by filling it up with more debt.  All it has done is feed the gravitational pull of the debt. until it is now bigger and stronger than they are.  Japan is NOT going to grow out of this. Neither are they going to print their way out.  And lastly, they can no longer borrow their way out, either.

Japan will not print their way out.  Not least because they are now in, and helped to cause, a full blown currency war.  Every nation is now trying to devalue. So as fast as Japan prints, other nations will print in turn.  The US is only a month away from its own trillion dollar attempt to stimulate and devalue by ‘buying assets’ with printed up dollars.  We know this is going to happen because two men who know have said so in the last two days: William Dudley formerly of Goldman Sachs and now of the FED and Jan Hatzius, formerly of the Fed and now at Goldman Sachs. Don’t you love the in-your-faceness of Wall Street.

Japan will not borrow their way out because Japan already has a sovereign debt load of around 200% of GDP.  It has chronic deflation. It DOES NOT ANY LONGER have a huge store of private savings nor are Japanese people any longer the prudent savers they once were.  The Japanese are now too poor to save any more than the rest of us. And all those post war savings have already been used to buy up previous rounds of Japanese government debt.  Meaning if the government’s endless debt binge were ever to falter not only would the government be wiped out but so would every man woman and child in Japan.  They have all been roped together into one vast debt-backed suicide pact.

And growth, the Rapture at the end of the financial recovery, which will life all true believer to paradise – well even the IMF, the born-again preachers of free-trade market fundamentalist theology – even they admit growth is faltering on a global scale.

Everyone is looking at Europe and America. And for good reasons. Both have crippling and unaddressed debts.  But Japan has already crossed the debt event-horizon that we have yet to cross.

More debt WILL NOT SAVE Japan or us. It will only suck us all in faster. The only way out is to destroy the debt itself.  Make it cease to be. By making those who made those debts eat them and watch them die together, like matter and anti matter  annihilating each other.