I highly recommend WHEN JAPAN COLLAPSES, released today over at The Burning Platform. While the tone of the piece is a bit hyperbolic, the author has gathered a solid set of data shown in chart form to back up his thesis. That is as follows:
"If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. The near failure of a 3rd world country (Greece) turned the world upside down. The failure of Japan would likely touch off a worldwide crash."
The key is that any significant shift away from the current global patterns of trade and investment flows will likely lead to major defaults, as governments and central banks have used their textbook policy options and the results have been maintenance of a delicate balance at best.
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6 comments:
Greece is the birthplace of our western culture, not a third world country.
@anonymous - yes Greece was the birthplace of Western civilization, but what have they done since the Bronze Age?
What other countries would default if 'stress tested' with an interest rate rise of this extent?
With home mortgages you need to be able to handle an interest rate rise of roughly 2% to get a loan. A 2% rise in the cost of debt to Ireland and many other countries would not be serviceable.
Worth following the discussion at the Burning Platform website where one commenter cogently responds to the poster's argument, patiently waiting for the poster to engage rather than engage in hyperbolic and rude ad hominems.
I'd be interested in Edwards' take on that argument?
Hello Mick,
Well very briefly, since this is a complex argument, it all depends on what happens to the external surplus. Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus.
Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is.
Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky.
Obviously common sense alone should show people that something like I just argued has to be the case, since otherwise Japan would have invented some kind of perpetual motion machine whereby you can simply keep printing money and eating it, and intuitively that has to sound strange. Most arguments for pyramid systems have this kind of property. I remember when people were arguing the Irish property boom wouldn't collapse since the immigrants who came in to do the construction would buy the houses they built.
One or other of the basic laws of thermodynamics seems to be getting violated in these cases. Too good to be true would be another way of putting it.
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