Sushi-Grade Crises

A dear friend sent us a message. “Comedy” was the title and, attached, was a cameraphone snapshot depicting, as our unpaid correspondent described it, “3-4 planeloads of people queuing to get through 2 scanners at customs at Ezeiza [Airport, Buenos Aires] while the 4 remaining scanners were conspicuously closed.”

This is typical of government operations in late-stage, degenerate socialist countries, like Argentina. What happened next is also typical…and instructive.

Again, according to our friend’s report, “After hurling abuse at the customs officials…300+ people made a run at the gates, pouring through un-scanned and un-taxed, carrying all sorts of illicit goods like iPhones and digital cameras.”

First time tourists might have been surprised at this flagrant flouting of the law…indeed, those accustomed to traveling in the US, where the TSA has conditioned individuals to leave both brains and dignity at home, might have been truly shocked. Homecoming Argentines, however, would have known exactly what to do. And they would have been front of the line-jumping line and first into the taxis.

We share this little anecdote not to make fun of the city’s gate-hopping porteños…but to praise them for their disobedience…and to give our Fellow Reckoners a glimpse of what’s coming down the pipes.

As anyone living under the vile though increasingly-impotent “Kirchnerista” rule well knows, it’s not that the Argentinian authorities lack the desire to tax and scan incoming passengers…it’s simply that they don’t have the resources to do so. The country is broke. Again. (Again…again…etc…) And it’s not alone. In fact, it might fairly be said that the entire welfare-warfare model of the west — plus Japan — is collapsing.

Get ready for line-hopping on a scale perhaps never before seen.

To be sure, this isn’t just about Argentina…or Greece…or even Spain or Italy. At least not exclusively. A recent story in The Atlantic wondered aloud, for example, “Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system?” The piece then went on to invite euro crisis-weary readers to turn their attention farther afield, to the world’s third largest economy.

“Think about Japan.”

Fellow Reckoners are by now familiar with Japan’s story…and of its differences and similarities to the situation in the “rest of the…uh, west.”

After Nippon’s “postwar miracle” of the 1980’s came crashing down, the Japanese government embarked on an unprecedented borrowing binge, designed to pour concrete, build infrastructure and stimulate the economy with the kind of “shovel ready” jobs that cause so many Keynesian kooks in the US to begin foaming at the mouth. For the better part of Japan’s two “lost decades” (and counting) the government simply took out new loans to “roll over” existing debt, taking advantage of extremely low interest rates to do so. (Sound familiar?)

How long can that continue, you ask? Well, we don’t know. Nobody does…but indefinitely seems like a long time. Probably too long. Could things finally be coming to a head?

“This year,” continues The Atlantic, “the Japanese government needs to issue debt amounting to 59.1 percent of GDP; that is, for every $10 that Japan’s economy generates this year, the government will need to borrow $6.”

Of course, this kind of government borrowing requires of Japanese people equally high levels of private savings. Unlike the situation in other notoriously spendthrift nations, where governments rely on the “kindness of strangers” to finance their borrowings, the Japanese government mostly issues debt “locally.” Indeed, roughly 95% of Japanese government debt is held domestically, by Japanese banks and insurance companies.

The problem here is that Japan has a shrinking population…and the young don’t quite save like the old once did. In a recent paper published by Professors Takeo Hoshi of USCD and Takatoshi Ito of the University of Tokyo, the pair found that savings rates are on course to fall from over 3% currently to below 2% before 2020. There they stay for roughly a decade, before gradually declining to roughly negative 3% by 2050.

Where will the government get the money to finance its borrowing then?

Even assuming expenditures continue along their current projections (as government expenditures almost never do)…and given what Hoshi and Ito call an “unrealistically optimistic assumption that Japan’s GDP will grow at 2% annually for the next 40 years,” the pair extrapolate a variety of scenarios in which the government debt-to-GDP ratio blows out to 300% sometime over the next decade. Should the yield on Japanese Government Bonds rise during that time, the figures could change dramatically. Indeed, some simulations have the ratio tipping 500% before the next two decades are up.

That eats up a lot — eventually all — of Japan’s domestic savings, forcing the government to rely on foreign lenders for cash, potentially driving yields on JGBs even higher. That’s bad news for Japan’s financial institutions too, which suffer valuation losses as interest rates rise. According to Hoshi and Ito, these banks and insurance companies “collectively hold about 142 trillion yen of central and local government bonds as of the end of March 2010 […] about 32% of total bank loans.”

Not insignificant, in other words. Not like letting a few queue jumpers skip ahead because the government is too overextended to man the scanners at the airport. Not like a few ne’er do wells hitting the streets in Syntagma Square, Athens, because the might have to work beyond 50 years of age. And not the kind of “crisis” that inspires a congress of iClad hipsters to camp out at the wrong end of Manhattan Island because their geography is as bad as their economics.

No. If Hoshi and Ito are onto something, we could be talking big fish. Really big fish. A sushi-grade crisis. And we haven’t yet gotten to the biggest fish of them all. More on that later in the week…

Joel Bowman
for The Daily Reckoning