A Quadrillion Yen And Counting
The Japanese Debt Bomb Could Set Off
Global Panic At Any Moment
How much is 1,000,000,000,000,000 yen worth? Well, a quadrillion yen is worth approximately 10.5 trillion dollars. It is an amount of money that is larger than the “the economies of Germany, France and the U.K. combined”.
Unfortunately, the only way that this bizarre quantitative easing program will work is if investors in Japanese bonds act very, very irrationally. You see, the only way that Japan has been able to pile up this much debt in the first place is because they have been able to borrow gigantic piles of money at super low interest rates.
Right now, the yield on 10 year Japanese bonds is sitting at an absurdly low 0.76%. But even with such ridiculously low interest rates, the central government of Japan is still spending about half of all tax revenue on debt service.
If interest rates go up, the game is over.
But now that the Japanese government has announced that it plans to double the monetary base, it would be extremely irrational for investors not to demand higher rates on Japanese government debt. After all, why would you want to loan money to the Japanese government for less than one percent a year when the purchasing power of your money could potentially be halved over the next two years?
Amazingly, this is exactly what the Japanese government is counting on. They are counting on being able to wildly print up money and monetize debt, but also keep yields on Japanese bonds at insanely low levels at the same time.
For the moment, it is actually working. Investors in Japanese bonds are behaving very, very irrationally.
But if that changes at some point, we could potentially be looking at the greatest Asian economic crisis of all time.
And there are some very sharp minds out there that believe that is exactly what is going to happen.
For example, the founder of Hayman Capital Management, Kyle Bass, has been sounding the alarm about Japan for a long time. He correctly predicted the subprime mortgage meltdown, and in the process he made hundreds of millions of dollars for his clients. Now he believes that the next major crash is going to be in Japan.
According to Bass, the bond bubble in Japan is so large that once it begins to implode fear is going to start spreading like wildfire…
Think about the psychology of all the players and financial implications if rates do move 100 basis points. Think about the solvency of a nation which currently spends 50% of its central government tax revenues on debt service, half of which earns the lowest yields of any country in the world.
You can’t look at this as a simple question. You need to think about this as a multivariate equation. You have to think about the incentives and the fears of all the participants. And you need to think about the fiscal sustainability of the government.
That increase is roughly equivalent to
the entire U.S. commercial banking system.
Many in the mainstream media insist that this party can go on indefinitely.
But that is what they said about the housing bubble too.
Sadly, the truth is that every financial bubble eventually bursts, and this global debt bubble will be no exception.
I hope that you are getting prepared while you still can.
http://theeconomiccollapseblog.com/
August 9th, 2013
Recent Comments