Night of the Living Debt

The worldwide night of the living debt continued with Greece, Italy, and the US. And so I mention them, nasty as I am, in the same breath with Japan.

In terms of national government debt as a percent of GDP, Greece has shot past 150% and Italy hit 120%. These levels of indebtedness are devastating and can never be paid back without major inflation (creeping default), devaluation, or outright default.

In the US, our federal debt as a percent of GDP is racing towards 100% and will hit that level in two months. Unless a miracle happens in Congress, which is unlikely, we will continue adding 10% to it every year. In two years, we will reach Italy’s status quo of 120%, and soon we will be Greece….

But you know what, I’ve been saying that about Japan for ten years, and every year I wait for it to blow up, and every year, the government is able to issue and sell enormous amounts of bonds at near-zero yields to institutions it controls, such as the Japanese Government Pension Investment Fund (the largest fund in the world), and to individuals who buy this crap either through their banks or via bond funds. Only a tiny percentage of JGBs are sold to overseas investors. When it gets difficult to unload JGBs, the Bank of Japan steps in and, through various mechanism, buys them outright (it also has a stated policy of buying Japanese stock ETFs and REITS when their prices drop too far).

And it works. To the point where Japan’s government debt as a percent of GDP is a stunning and gut-wrenching 226%!

With a declining working-age population, the burden per worker has become astronomical, and when it blows, which it will, it will demolish retirement nest eggs and pension benefits of those who have worked long enough to have them. But brutal as it may sound, it will be a Japanese affair, a shared communal sacrifice. It’s all part of being Japanese. And every Japanese I talk to knows this.

But when the US, Italian, or French debt blows up, it will have worldwide repercussions of the most magnificent proportions as these bonds are owned by a myriad of institutions and governments around the globe.

To avoid this, all governments and central banks, including our Fed, are doing exactly what the Japanese have done for years: issue more bonds to captive investors, print more money to monetize the remaining debt, and continue with their deficit spending—with the hope that the blowup can be delayed another year, and then another year, etc.

So I expect a continuous flow of crises, interspersed with political hand-wringing and mini-crashes, that will result in reopening of the money spigots, that will be followed by more of the same. And each year, the problem will get bigger.

It’s easy to forecast the obvious and be right about it eventually, but it’s hard to arrange your finances to where they can survive these events or even make money off them, without getting destroyed beforehand. A lesson all those who shorted JGBs have had to learn and relearn for years. Though their contention that this is a Ponzi scheme is correct, they’ve lost money, and until the day that the Ponzi scheme actually blows up, they’ll continue to lose money. Because a central-bank supported Ponzi scheme is like the Energizer Bunny….

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