“If Japan can survive for a generation on 200 per cent debt to GDP, why can’t Europe and America?” Clem Chambers, CEO of ADVFN.com and author of titles including ‘A Beginner’s Guide to Value Investing,’ explains.
The fiscal budgets and balances of US and European markets are horribly in deficit. Major changes are required to fix the problems. Not only are Budget deficits out of control, debt burdens are also ballooning. Common sense tells us cutbacks are required to rebalance.
Unfortunately for the developed world, a return to 3% deficits and 60% to GDP debt loads is simply not on the short or medium term horizon. Change seems a long time in the works.
Everyone hates change, especially when it’s going to make them worse off. Turkeys do not vote for Christmas, after all. Politicians realise electorates cannot bear the thought of cuts impacting on them. As such, there is little real impetus – except for pressure from the outside forces of global markets – for the change needed to put countries back on a safe economic course.
The ship of state in the developed world is therefore heading straight at the iceberg of economic disaster with little turning of the helm.
Deep down in the thinking of European states is the hope that Europe can reproduce the Japanese model following their respective property bubbles. While the Japanese grumble about their troubles, an outsider could be forgiven for wondering what the problem is. Japan is an epitome of a modern society – clean, safe and high tech. Japan is also the model of an incredibly indebted state, with a mind boggling debt of 200% of GDP.
If Japan can have a 200% debt to GDP: why not Europe, and why not America? Japan has successfully crushed interest rates to zero and borrowed mountains of money for nearly a generation, why can’t the rest of the developed world?
If Europe and the US could engineer a 200% debt to GDP environment then there would be plenty of room to spend. The US is ‘only’ 100% of GDP in debt – even defaulting Greece would have 50% GDP headroom if it could borrow like Japan.
Japan’s luck is that the Japanese save at home. It is the humble Japanese saver, not the world global financial markets, keeping Japan’s government liquid. Francois Hollande, soon likely to be the new French leader, is on record as saying that this is an option in France. Rather than turning to vengeful global market vigilantes he will borrow France’s fiscal needs from the French population.
In truth, the Japanese way is not the way out of trouble for the EU, or America. In addition to the strong likelihood Japan itself will one day implode under its debts, Europe and especially the US do not have big trade balances to counterbalance fiscal deficits. Money is haemorrhaging away via trade balances. To top it all off, the Japanese population save because they have money to save in the first place. The high tax to GDP levels in Europe mean there isn’t much left over in workers’ pockets to save at the end of the month, so even if they wanted to buy government bonds, the money just isn’t there to do so.
Meanwhile, the European Central Bank (ECB), Federal Reserve and Bank of England keep ‘financial repression’ intact, printing money to prop up banks to prop up governments while keeping rates local savers earn at extremely low levels via market manipulation.
It’s a kind of stealth debasement and it’s working for now. However, it requires giant, artificial flows of money to be dammed up and released through financial sluice gates into the wider economy. That will prove tricky in the long run.
Perhaps the right balance will be kept to stop a sudden flood of money escaping into the economy and driving a wave of runaway inflation. This is the central fear surrounding the entire ‘unconventional stimulus’ that’s going on, a fear that it will in turn, unleash conventional inflation.
The time will come when the temptation will be to let the government/bank liquidity cycle rip. It might be to buy votes, it might be to end the grinding cycle of recessions, or perhaps it will be created by a market revolt or economic miscalculation. If that does happen, there will be yet another crisis.
Meanwhile, the Japanese solution will not work in Europe or the US. Western populations will not and cannot be the source of sufficient funds to feed the bloated states they reside in.
The developed world must restructure its economies to align with new realities. Many politicians must fall from grace. If governments don’t do it for themselves with finesse, then global economics will do it later on with a sledgehammer.