Crushing Burden of Debt

A crushing burden of debt threatens to sap America's growth for years to come. Please consider Trillions Of Troubles Ahead.

Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world "trillion," as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.

The total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Add the unfunded portion of entitlement programs and we're at 840% of GDP.

The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.

It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.

Japan's recession is now 19 years old. It has the highest debt-to-GDP level (227%) of any industrialized country. The Fitch rating agency is talking about a potential downgrade of Japan's debt. Japan's stock market is still down 75% from the high in 1990. We predict it will make new bear market lows next year. That will make it a 20-year-long bull market [bear market makes more sense - Mish] on the way to 25 years. The bulls in the U.S. should consider that possibility in the formerly great United States of America.

I do not believe the bullish theory that the U.S. situation is different than Japan's. Ours is so much worse.

Bank Of Japan Will Not Tolerate Deflation

Amazingly, the nation that has been in and out of deflation for 18 years says BOJ Will Not Tolerate Deflation

The Bank of Japan held interest rates at 0.1 percent and policy makers said they are intolerant of price declines amid signs deflation may undermine the economic recovery.

The policy board “does not tolerate a year-on-year rate of change in the CPI equal to or below zero percent,” the central bank said in a statement in Tokyo today after the unanimous rate decision.

Japan's CPI Negative

Given Japan will not tolerate a negative, inquiring minds might be wondering why the CPI is negative. Please consider Japan’s Notes Rise Most in 13 Months on Central Bank Loan Plan.

Deflation blighted Japan during its so-called lost decade of stagnation after an asset bubble burst in the early 1990s. The government has stepped up calls on the BOJ to prop up growth since it declared the economy was in deflation on Nov. 20.

Consumer prices excluding fresh food slid 2.2 percent in October from a year earlier after dropping a near-record 2.3 percent in September.

“Japan’s CPI will stay negative for some time,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. “Japanese real interest rates are higher than U.S. real yields, which make Japanese bonds attractive. I recommend buying 10-year Japanese bonds.”

OK Japan what are you going to do?

Going deeper in debt with ridiculous Quantitative Easing and Keynesian stimulus efforts did not cure deflation in Japan and it will not cure deflation in the US either. Instead, it will drag the problem out, while increasing national debt.

I find it amusing that people believe debt can be inflated away. They ignore the fact that an increasing amount of interest is needed to service that debt. You can see concerns in the US already with tax increases by Obama.

As the Forbes article notes, eventually interest on the debt will consume all the tax revenues. That holds for both Japan and the US. Both countries will be in real trouble when interest rates rise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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