Japan: Slowly Going Broke

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!


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.

The Daily Reckoning