In Case You Missed it…Japan’s government debt exceeds 230% of GDP, the highest ratio in the developed world, putting Japanese bonds on the verge of default.
And thanks to their Godzilla economics Rising interest rates are beginning to dramatically increase the government’s debt-servicing costs.
For decades, Japan survived by suppressing interest rates to nearly zero while endlessly rolling over debt. That strategy only works so long as rates remain artificially low.
But once rates begin to rise, the mathematics become impossible to hide.
Cue up: The Bank of Japan recently raised rates to 1%, the highest level since 1995.
That may sound insignificant compared to rates elsewhere, but Japan built its entire fiscal structure around the assumption that rates would remain near zero forever.
Big mistake…Huge!
Translation…they can’t service their debt.
But what most people don’t realize is that sovereign debt crises never begin because governments run out of money overnight.
They begin when interest costs consume an ever-larger share of tax revenue.
On cue, Governments then borrow more simply to pay interest on previous borrowing.
And Japan crossed that line years ago.
Japanese Bonds/Godzilla Economics
And regarding the Sovereign Debt Crisis, we have said in the past that Japan would likely be the first major developed nation to face the sovereign debt crisis head on.
Their population is aging, the tax base is shrinking, and social obligations continue to rise.
And there is no realistic path to paying down the debt.
(Sounding familiar?)
Governments always believe they can borrow forever until suddenly they cannot.
And history has demonstrated this repeatedly, from ancient Rome to modern Europe.
Ironically (or NOT) Europe is a close second to Japan with America’s debt most likely being the last one standing.
READ: Gov’t Interest Expense Exceeds Military Spending (HERE).
In the not-so-distant future we expect the economic destruction of Japan will make Godzilla’s * destruction pale by comparison.
(*Note: my good Japanese friend, Nobi, reminded me that Godzilla is pronounced GODZIRRRAAAA!)
Nobi also reminded me how most nations assume that central banks could permanently suppress rates.
And Japan simply arrived at the end of the road first because it accumulated debt faster than everyone else.
Bottom line here?
Japan is merely the first warning shot.
The sovereign debt crisis has begun, and once confidence starts to crack, governments everywhere will discover that there is no such thing as endless borrowing.
Learn how to hedge your portfolio from this imminent Sovereign Debt Crisis in our July newsletter (HERE).
Share this with a friend…especially if they like the old Godzirrraaaa movies better than the new ones. They’ll thank YOU later.
And tell them:
We’re Not Just About Finance
But we use finance to give you hope.
“And you shall know the truth, and the truth shall make you free.”
~John 8:32~
