12/29/09 Ouzilly, France We reported that the US government would need to roll over $2.5 trillion worth of debt next year. We probably erred. The number was right, but it was meant to be over the next two years. During the next two years also, worldwide, banks need to roll over $7 trillion. Whether it is over one year or two years, we’re talking big money.
Most people who bother to think about it are coming to the conclusion that this is very inflationary…and very bullish for gold. They think the Fed will need to “monetize the debt” directly, or indirectly. One way or another, they say, the central bank will have to increase the volume of money so that the government can finance its deficits.
Paul Krugman, Nobel Prize winner in economics, suggested that the Fed add another $2 trillion to the nation’s monetary base, partly to accommodate federal borrowing…and, he believes, to stimulate employment.
This idea is widespread. Richard Koo, one of the few economists to understand the Japanese depression and what awaits the US, thinks along similar lines. The US economy is going into a depression, like Japan; the government must spend huge amounts of money in order to keep GDP from falling.
Japan’s top man shocked the nation last week when he announced the largest budget deficit ever. The government will spend about $1 trillion – a new record. And it will collect less than half that much in taxes. Meaning, most of what the Japanese government spends is borrowed – something the Japanese haven’t done since the days when Americans were dropping bombs on them.
The Japanese government is doing what it should do, says Koo. It is replacing missing private spending with public spending. So doing, it has avoided a drop in GDP and employment. Throughout its 20 year slump, Japan’s GDP has never fallen below the peak set in 1989. Nor has unemployment ever risen above 6%. Bravo!
Bravo?
Thanks to this new budget, Japan’s national debt will reach a new record…nearly 200% of GDP. The Japanese have a lot of private savings, but they also have a lot of public debt. And what have they gotten for it? Well, they have kept people employed…and have allowed the private sector to pay down its debts. Or, to put it another way, they have lived through a classic depression fairly comfortably. Instead of forcing the banks to fess up to their mistakes and clean up their balance sheets, the Japanese government saved them. Instead of allowing big companies to go broke…and other companies to take their places…the Japanese propped up the ‘brain dead’ firms…and kept them alive with taxpayers’ money. Result? A depression that should have been over in, say, 5 years…has been stretched out to 20. And now the Japanese face a public debt that is bound to cause them big problems in the years ahead…. What kind of problems?
Well, Japan is going broke… just like the US.
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I guess we’ll just have to accept the current situation as the new normal. The Japanese have led the way and beaten down a well worn path for us to follow.
This also brings to mind the Star Trek series and movies. Although Star Trek promoted a benevolent military dictatorship, as opposed to the Romulans and the Klingons, and [supposedly] money and material wealth had been pretty much eliminated.
My question is, exactly how did they pay for all those star ships and planetary outposts? Not even the Soviet Proletariat worked for free.
Well I guess $200 dollar hamburgers and $100 grand Kia Sorrentos will the be the price we’ll all have to pay for livin large in the 80′s, 90′s and the 00′s.
Born-again Keynesian Paul Krugman’s pseudo Nobel should be referred to by its correct title:
“The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”
Alfred had nothing to do with its creation.
Speaking of dropping bombs, I have a question for Mr. Bonner.
What would in his estimation be the impact on our economic situation right now if the U.S. launched a major war offensive?
I’m also wondering if it would be possible to outline in an article what would be the likely impacts in greater detail. The reason why I ask this is I believe this is the next move by this administration to divert attention from the financial disaster at our doorstep.
Rick Halsen
‘scuse me BB, lemme handle this one:
Rick asks about the impact of a major war offensive by USA in light of all this.
with what? We’re committed. Therefore, the effect would be a compulsory draft, a further erosion of liberty, wealth within the FIRE sector, more sovereign debt, more insolvent banks….
O, never mind. Do what you want.
So why are government expenditures counted as a positive in GDP? All government expenditures are paid (eventually) by taxes–which have a negative effect on GDP.
Always has been, since the days of GNP.
Think of the old Soviet Union. Otherwise, how do you measure the size of the economy?
“Therefore, the effect would be a compulsory draft, a further erosion of liberty, wealth within the FIRE sector, more sovereign debt, more insolvent banks….” Its interesting you seem to refer to what is going on now “liberty”. Also a compulsory draft would solve some of the Health Care problems as it would put a lot of young people into the VA health care system so maybe that is the underlying plan. If you can’t get a public option start a draft.
Start a war, get free health care, free housing, free education. Exquisite.
Back in the US,
Back in the US,
Back in the USSR.
Yipee!
Waddyamean….”….start another major offensive?”
What the HE@# do you think we’re doing now in Iraq and Afghanistan, not to mention in the other over 700 “Roman outposts” we have in the real world?
Starting a draft would be the best thing to happen…it would arouse the public to the internal/external fiasco we’ve made of this country.
But, firstly (an unrealistically) draft all the children of the Government Legislature, Congress, and the Senate FIRST!! Then children of the General’s etc….military hardware producers…you get the picture etc…..
Bring it on!
Well, well, well…Did the doom crowd see that great ISM number? Off to new highs in the market on excellent economic numbers. I’ve been telling you all this for months. You just don’t want to hear it I guess.
“…What the HE@# do you think we’re doing now in Iraq and Afghanistan…”
Beats me. Beats our Nobel Peace Prize laureate C-in-C too.
Btw what I meant about a ‘major offensive’ is the effect another one would have considering the current economic situation.
Taking that in context with respect to the precarious currency markets the question for Mr. Bonner still remains valid IMO.
Bottomline: Can the U.S. handle another military offensive without accelerating this recession/depression into different level altogether?
RH
“…A depression that should have been over in, say, 5 years…has been stretched out to 20.” What even bright people like Bonner don’t get, is that the VERY BASIC problem in Japan, and soon here in the USA, is demographics.
Occam’s razor,”entia non sunt multiplicanda praeter necessitatem”, is the principle that “entities must not be multiplied beyond necessity” and the conclusion thereof, that the simplest explanation tends to be the best one….not the long fancy ones–even the great depression can be simply explained by DEMOGRAPHICS!
The simplest explanation is the older people get the less they spend, and in Japan and US they have or are becoming the dominant groups.So we see less spending, more saving (IE recession/depression). So many people try to blame the gov’t for making it worse when actually they do make it somewhat better, but their (gov’t) efforts will have no lasting or long term impact.
Bonner was correct in his early book, “Financial Reckoning Day, Surviving the Soft Depression on the 21st Century”. Shouldn’t have abandoned that, just researched the why better.