What Does Japan’s Implosion Mean For the Rest of Us?Submitted by Michael Nystrom on Tue, 01/26/2010 - 22:07
by John Rubino | January 26, 2010
Standard & Poor’s is threatening to cut Japan’s credit rating, which doesn’t sound like that big a deal in a world where no one’s credit is quite what it used to be. But Japan is a special case. It’s been borrowing like crazy at rates two or so percentage points below what the U.S. pays on 30-year Treasuries. And it intends to further ramp up its borrowing to keep the economy from falling back into deflation.
A lot of people think this is a really bad plan: It is Japan We Should Be Worrying About, Not America, and A Global Fiasco is Brewing in Japan, by Telegraph’s Ambrose Evans-Pritchard, Debt Issues by economist Paul Kasriel, and No Way Out for Japan, by blogger Mike Shedlock
The gist of the argument is that Japan is heading for a “debt trap,” which will unfold as follows: When its pool of domestic savings runs out (as it will in the coming year) the Japanese government will be forced to borrow from foreign investors, who will doubt its ability to pay and demand a higher interest rate. As billions in short term paper roll over at ever-higher rates, interest costs will rise, requiring even more borrowing, which causes investors to demand even higher rates, and so on, until it dawns on the markets that this is a self-reinforcing cycle. Buyers scatter, rates spike, the economy crashes, game over.
Japan, with its aging population, massive government debt, and anemic growth rate, appears to be headed this way sooner rather than later. This is clearly bad for the people who depend on, say, a government pension or interest on government bonds, which includes most of Japan’s population. But what does it mean for the rest of us?
There are three possibilities, one relatively benign, two not:
Read on at Dollar Collapse