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Thread: chart of the week - gov't deficit levels before hyperinflations

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    Banned Melonie's Avatar
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    Default chart of the week - gov't deficit levels before hyperinflations

    actually this is part of an extremely 'read-worthy' article by one of the most thought-provoking 'foreign' economic journalists ... who is often not afraid to tackle 'taboo' subjects that never seem to appear in mainstream US financial media !



    (snip)"A global fiasco is brewing in Japan
    By Ambrose Evans-Pritchard

    I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

    My intended point — overly condensed — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

    So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again.

    His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

    The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

    Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.








    The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

    We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

    Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

    The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

    Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

    Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

    “This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said.

    Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake."(snip)

    with many thanks to the author and the UK Telegraph !!!

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    Banned Melonie's Avatar
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    Default Re: chart of the week - gov't deficit levels before hyperinflations

    attempting to draw some bullet point conclusions ...

    - historically speaking, any country that chooses to run budget deficits exceeding 33% of its GDP for several consecutive years faces a high risk of hyperinflation of its currency / rapid rise in interest rates.

    - Japan has now reached the high risk plateau, and is already 'unloading' some of its sovereign assets ( i.e. US Treasury Bonds, European Treasury Bonds ) in order to finance ongoing current year deficit spending without the necessity of borrowing as much money from foreign lenders.

    - Japan's 'unloading' of sovereign assets can directly cause rising interest rates for those countries whose Treasury Bonds are being 'unloaded' i.e. the USA. This is because the sale of existing US Treasury Bonds by the Japanese gov't directly competes with the sale of newly printed US Treasury Bonds by the US gov't for the same pool of foreign investor money.

    - Japan's previous ability to maintain artificially low interest rates was due to the combination of a high traditional savings rate by Japanese citizens, and the gullibility of Japanese citizens to accept 'official' news that the Japanese economy wasn't in any sort of trouble. Neither can be counted on in the future.

    - The USA has now crossed the same high risk threshold, with 2009 tax revenues only comprising 54% of the money actually spent by the US gov't in 2009 ( the other 46% was borrowed or printed ) ... with 2010 projections looking even worse.

    - unlike Japan, US citizens have traditionally not been savers over the past decade ... thus for the same decade US deficit spending has been financed by foreign lenders ( including Japan ). This fact makes Japanese 'dumping' of US Treasury Bonds an extremely unstable development ( i.e. which other foreign lenders will be left to buy new US Treasury Bond offerings needed to maintain 2010 US gov't deficit spending ?)

    - accumulating gov't deficits i.e. accumulating gov't Treasury Bond obligations place an ever increasing burden on that country's taxpayers to service this Bond debt. In Japan's case, given existing Japanese gov't debt obligations, if the Yen interest rate should increase to just 4% this would require that essentially 100% of all money collected from Japanese taxpayers be used to pay interest and principal on those existing gov't debt obligations.

    - While cumulative US gov't debt obligations were much lower than Japan's through 2008, in 2009 and (projected) in 2010, US gov't debt obligations are growing extremely rapidly. This in turn requires that an ever increasing share of US taxpayer money be channeled to servicing interest and principal payments on the growing pile of US Treasury Bond debt even if US interest rates remain at current ( and historically low ) levels. However, as with Japan, if US dollar interest rates should take off, the share of US taxpayer money needed to service interest and principal payments on future US Treasury Bond debt will skyrocket.

    - when gov'ts reach a situation where their accumulated Bond debt obligations exceed the ability of the country's taxpayers to make interest and principal payments on existing debt, and foreign lenders precipitate major increases in interest rates in order for that country to sell additional Bonds, the gov't is left with no choice other than to print up new money with which to finance it's current spending requirements. This rapidly devalues the 'purchasing power' of the country's currency, and rapidly precipitates price increases for everything purchased with that country's currency ... i.e. hyperinflation.

    ~
    Last edited by Melonie; 01-17-2010 at 07:30 AM.

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    Default Re: chart of the week - gov't deficit levels before hyperinflations

    Quote Originally Posted by Melonie View Post
    attempting to draw some bullet point conclusions ...
    Once again, the Dollar Den of Doom spins off track into politics. I won't even address the wacky " bullet points" as that would just feed to spin into politics.

    Z

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