Will This Country Implode Economically?

When you look at government debt, government spending, and central bank inflation, it is sometimes amazing that things can putter along as long as they do.  In many ways, it is a testament to the free market.

Libertarians often focus on the bad things that government does, thinking this will overwhelm society.  Yet, despite the massive interference, markets often find a way around things.  Technology and growth continue, despite the intervention.  Growth is a lot slower than it would be otherwise, but it still continues to some degree.

There is one country in particular though that puzzles me, because it seems that things have just hummed along for far too long.  This is the story of Japan.

The stock market in Japan (the Nikkei) topped out at almost 39,000 in 1989.  It is now around 16,500, just 27 years later.  For anyone who says that stocks always go up over the long run, talk to a Japanese investor from the late 1980s.  I guess if you think long term is 50 years or more, then maybe this is still accurate.

The Japanese central bank did maintain a relatively tight monetary policy throughout the 1990s and 2000s.  It is more recently that massive monetary inflation has been tried.

Despite the claims, there was never any severe deflation in Japan.  There may have been years with very minor price declines, but it was really mostly flat.  When you live in a world of ever-increasing prices, stable prices look like deflation.

Yet, during this time of relative monetary stability, the national debt continued to grow.  And interest rates stayed low.  This means that Japanese government debt was being bought up by private investors, and perhaps foreign central banks.  It is only in recent years that the Bank of Japan has been buying most of the Japanese government’s debt.  This is why they have been able to maintain negative interest rates.

It is just ridiculous how much the debt has grown in Japan.  According to this site, the debt-to-GDP ratio in 2015 was 229%.  To put this in context, the U.S. is considered very high with a ratio of just over 100%.

This is still serviceable with the low (including negative) interest rates.  You probably get tired of hearing the question asked, “What happens if interest rates rise?”  But this is a legitimate question.

Things can fall apart really quickly.  Due to some crazy loyalty or blindness by Japanese investors, this game has already gone on way too long.  You could see some kind of an economic implosion in Japan, with a depression that hasn’t been seen in a modern-day first-world country.

I actually hope it happens sooner rather than later for the sake of the Japanese people.  The longer things draw out, the more pain there will be in the future.  Things are already looking bleak as they are.

We should also hope this happens so that things don’t continue to get worse in the U.S. and elsewhere.  The U.S. Congress continues to run massive deficits, and this is during the time of a supposed recovery, along with a time of low interest rates.  It will not take much for the annual deficits to explode above $1 trillion again.  This is with the national debt getting ready to go past the $20 trillion mark.  It is also during a time when baby boomers are retiring and the unfunded liabilities of Medicare and Social Security continue to increase.

There is going to be a massive worldwide correction at some point.  It is hard to see exactly how things will play out.  My suspicions are that Japan will be one of the leaders, if not China or Western Europe.

Japan makes Greece look solvent by comparison though.  Japan is still far richer from the previous wealth built up from the last few generations.  But it seems they are consuming more than they are producing now, and resources are being misallocated on an unprecedented scale.

Japan may be the big story to watch over the next few years.  It is Keynesianism on steroids.  It is almost as if Paul Krugman had taken over the economy for the last few years.  It isn’t going to end well.

We can only hope that Americans learn the lessons that we will soon witness coming out of the Japanese economy.

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