Econintersect: Japan has been been called a “bug looking for a windshield” (John Mauldin) and the world’s biggest Ponzi scheme or a financial train wreck (by too many to mention individually). The reason for these concerns is that the government debt to GDP (gross domestic product) ratio is up ion the stratosphere, recently reported at 220%. But how can such an apparent disaster waiting to happen be be the world’s largest creditor? An article by Ellen Brown in GEI Opinion has explored that question. She concludes that the debt is simply an artifact of choice by Japan; they preferred to issue bills and bonds rather than to issue debt-free currency.
A. Gary Shilling has discussed the Japanese situation in a June article at Bloomberg:
….efforts by the government and central bank to resurrect the economy for two decades, but with little success. Instead, these attempts have set up Japan for a slow-motion train wreck, characterized by leaping interest rates on government debt and a collapsing yen.
Yet this has been the projection for Japan for much of the past 20 years. The country just keeps plodding along and building debt. A consequence of the combined monetary and fiscal policies in Japan have kept the country rolling in and out of recessions for more than two decades. But the train wreck never happens, the bug is never found splattered on a windshield.
One reason for the apparently unexpected stability of Japan is the amazing fact the the country is the world’s largest creditor. Japan has been a net creditor nation for 44 consecutive years through 2011, and has been the world’s biggest creditor nation for 21 consecutive years.
At the end of 2011 the rest of the world owed Japan $3.2 trillion, according to the International Business Times. During the Great Financial Crisis Japan almost single handedly bailed out the IMF (International Monetary Fund). Japan is now a major contributor to rescue funds for Europe. The country takes turns with China as the largest foreign holder of U.S. debt, currently holding about $1.12 trillion, slightly behind China’s $1.16 trillion.
The following contains some editorial content.
One reason why Japan isn’t on any windshields is the country is very wealthy, having some of the world’s top technology resources and highly productive high-end manufacturing and services. These continue to produce a very high standard of living for the Japanese. There is an aging demographic for Japan and this high productivity will have to support a greater and greater proportion of retired persons. That is when the doomsayers predict the economy will blow up under a crushing debt load that they say will no longer be able to roll over as savings for their citizens. About 95% of the government debt is owned by the citizens as savings. What do people do in retirement? They spend down their savings.
Will this be the time that the preference for debt creation of money discussed by Ellen Brown will be partly converted to debt-free creation of money? After all, Econintersect will suggest that the creation of money through debt is very logical to meet a savings need of the populace, but creation of money through direct means is very logical to meet the spending needs of the populace. The required management for the process is to not create more money than needed to buy the productive capacity of the economy. That should not be a terribly difficult job for a train that some thought would wreck years ago. Or for a bug that still isn’t on a windshield.
- Japan’s Debt Sustains a Deflationary Depression (A. Gary Shilling, Bloomberg, 04 June 2012)
- The Myth that Japan is Broke (Ellen Brown, GEI Opinion, 11 September 2012)
- Japan: Still the World’s Top Creditor Nation for 21 Years (EW News Desk, International Business Times, 25 May 2012)