JAPAN, THE NEXT CANDIDATE?

’’Have we really understood the underlying meaning and importance of the Japanese Central Bank «takeover» by the government? The abolition of its independence that is, so that the Japanese government can directly intervene in monetary policy decisions? What will be the consequences internationally, if Japan collapses?

What could happen to the planet, in the case of a major panic in the bond market, triggered by Japan? Would all other countries try to rescue Tokyo, like in the case of Greece? With the yen at record lows, are we perhaps witnessing the beginning of a mass exodus-«currency run»?’’

While the whole World is focused on the Euro-zone debt crisis and on the U.S. fiscal cliff, it seems that Japan is on the turn of the devil – having most likely surpassed the point of no return.

Japans public debt is approaching a frightening rate equal to 240% of GDP, its economy is recessional once again, the trade balance is no longer positive and the country’s exports have collapsed – among others, as a result of the «embargo» set by China, regarding rare metals needed for the production of high technology products.

Sooner or later, the markets will start targeting Japan, resulting in incalculable consequences for the financial stability of the entire planet. In particular, the country’s Central Bank practice of printing money in an increasing rate in order to fight the recession, will very likely lead to the downfall of Japan – through interest rate increases that are close to zero today.

With the Yen in free fall, many believe that investors, both inside and outside the country, will soon loose their confidence in the solvency and credibility of the government. In this case, a possible mass exit from government bonds would drag down the value of the Yen even more – with Japan plunging into a currency crisis, the size of which could drag along the entire planet.

’’What would then happen if Japan (like in the case of Portugal, Ireland, Cyprus, Spain, Greece etc.) was to face bankruptcy? Alternatively, what would be the results on the rest of the world, if the country was to print large amounts of money, in an attempt to avoid going bankrupt?’’

According the many, one such incident would make the 2008 crisis look like a child’s play – since dealing with it, in order to avoid conditions of panic in the global financial system, would require a coordinated rescue of Japan by the IMF, the U.S., China, Russia, as well as by all creditworthy countries in the world. Together they would have to «underwrite» the debts of Japan, or at least a large part of them.

To conclude, somewhere here the irrational cycle of rescue policies would come to an end; a policy system that was essentially «launched» in 2007 by the U.S. At the end of this diabolic cycle, the entire planet would have been under a «rescue umbrella», somewhat like in the case of Greece, Ireland etc. today – where each country would vouch for each other and «vice versa». Sometime thereafter, a huge explosion would follow – when each country would eventually loose trust in every other.

THE HOUSE OF CARDS

The U.S. are (supposedly) looking for a way to avoid the «financial/fiscal cliff» (a problem they publicly present as being solved), while simultaneously the central bank (Fed) floods the markets with «freshly printed», inflationary dollars – essentially hiding the superpowers huge problems: its deficit and current account balance, as well as the country’s public debt (above 110% of GDP).

Something similar happens in Japan, where the newly elected government plans to increase the money supply, even though the country’s debt has exceeded 230% of GDP – and as a result, Japans market indices are continuously climbing.

In the third «pillar» of the West now, Europe, the debt crisis intensifies constantly – with the ECB also producing new money (buying bonds of indebted member states, three-year lending to banks), although at a lower rate than that of Japan and the U.S.

The whole set-up therefore is a house of cards or a «Ponzi scheme», as the method of paying off older debts by taking on new ones is called – which means that both politicians and central bankers continue to «hide the problems under the carpet», since debts are not paid off by generating a profit, but by additional borrowing.

In any case, the accumulated debt of the West will never be payed off – while by nature, a «Ponzi scheme» suddenly collapses without any warning.

The reason the house of cards was formed is, as we have already mentioned, the huge debts – public and private. For example, the total debt of the 18 largest economies in the OECD (Organization for Economic Co-operation and Development, founded in 1961) was at 160% of their GDP in 1980 – today (2011) debts have soared to 321% of their GDP. Deflated, the governments have increased their debts fourfold compared to 1980, households have a six-fold increase, and real economy businesses have tripled them.

Concluding, debts are of course not negative by nature, as long as they are used to promote growth in an economy. However, in recent decades, debt was almost exclusively incurred for the purpose of consumption, speculation, and to pay off older obligations – so that the house of cards would not collapse.

If we now add to the official debts the huge hidden and unsecured debts, generated mainly from insurance and pension plans (which are impossible to be financed in the near future, since they have not adapted to the new demographic conditions), then we realize that a second time bomb exists in the foundations of the system – one that will soon explode, since «de-activating» it would require the imposition of extremely high taxes, that are impossible to be accepted by societies, without a revolt.

Until then, stock markets will most likely continue to rise – since they are «feeding» from the new money that central banks channel into the markets; Money that is of course not directed towards the real economy (realizing of course the major risks they face due to a possible collapse).

*Note concerning the «fiscal cliff» in the U.S.: Basically the fiscal cliff is being dealt with by the U.S. via reductions in public spending and increases in tax levels, thus reducing consumption (one of the four factors that constitute the GDP) by approximately 400 Billion Dollars – an amount equivalent to 3% of the country’s GDP, that would cause its growth rate to drop to 1%, but without causing a recession.

Athens, 02.04.2013

Date of original: 28.12.2012

Translation of original: Dennis Viliardos

    Vassilis Viliardos is an Economist and an Author of several books on the Greek economic crisis. He has earned his Economics degree in ASOEE (Greek University of Economics) and in Hamburg, Germany.  He lives in Athens, Greece.