Japan: A Country On the Brink of Fiscal & Economic Disaster!

I wrote several years ago that Japan is a bug in search of a windshield and in January I wrote that 2013 is the Year of the Windshield. Japan is a country that is on the brink of fiscal and economic disaster!

So writes John Mauldin (www.mauldineconomics.com/frontlinethoughts/) in edited excerpts from his original article* entitled The Mother of All Painted-In Corners. (A HAT TIP to SeniorD for bringing this remarable article to my attention and now to the thousands who visitors munKNEE.com every day.)

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Mauldin goes on to say in further edited excerpts:

From a global perspective; Japan is not Greece:

• Japan is the third-largest economy in the world.
• Its biggest banks are on a par with those of the US.
• It is a global power in trade and trade finance.
• Its currency has reserve status.
• It has two of the world’s six largest corporations and 71 of the largest 500, surpassed only by the US and  comfortably ahead of China, with 46. Even with the rest of Asia’s big companies combined with China’s, the total barely surpasses Japan’s (CNN).

In short, when Japan embarks on a very risky fiscal and monetary strategy, it delivers a serious impact on the rest of the world and doubly so because global growth is now driven by Asia.

Japan has fired the first real shot in what future historians will record as  the most significant global currency war since the 1930s and the first in a world dominated by true fiat money.

…Japan has  painted itself into the mother [of] all corners. There will be no clean or easy exit.  There is going to be massive economic pain as the Japanese try to find a way out of their problems, and sadly, the pain will not be confined to Japan.  This will be the true test of the theories of neo-Keynesianism writ large. Japan is going to print and monetize and spend more than almost any observer can currently imagine…

The Mother of All  Painted-In Corners

In no particular order, let’s look at some facets of the daunting task facing Prime Minister Abe and the country of Japan. [Go here to read the specifics of each of the facets identified below and here for an enlightening short video on the Japan situation.]

1. The Mother Of All Painted-In Corners – the daunting task facing Prime Minister Abe and the country of Japan…

2.  Damn the Torpedoes, Full Speed Ahead! – Japan desperately needs more exports…

3. Six Impossible Things – Japan is in an almost ridiculously impossible situation…

4. Unwarranted Humility – The solution is massive quantitative easing…

5. There Is No Turning Back – Now, some investing consequences.

The fiscal and monetary expansion already implemented has been so extreme that there is no turning back from Abenomics. Unless Japan can achieve much faster economic growth, Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it will bankrupt the financial system and quite possibly trigger hyper-inflation.  This is why Abe’s radical reforms will go forward, and in time aggressive  monetary policy will need to be backed up by larger structural reforms.

The government of Japan has no choice. They are painting themselves into the Mother of All Painted-In Corners, yet they must continue to paint or collapse.  They have fired the first shot in what will be the first real currency war of our lives, not the little sandbox versions we have experienced so far. There is NO historical analogy. None. The last major currency war, in the 1930s, happened when the  world was largely on a gold standard. We now live in a world awash in fiat currency.

• Can Europe sit by and watch the yen fall 50% from where it is today?
• Will Germany allow it?
• What will China do? If they respond in kind, they risk inflation. If they  don’t, they risk losing export sales and jobs.
• Malaysia is on a borrowing binge to finance its real estate growth.
• Indonesia?
• Korea certainly can’t sit idle  and watch its chaibols (the Korean version of the Japanese keiretsu) get  hammered, can it?

For a time, then, major central banks are going to have to sit on their hands  and do nothing, as they can’t stop printing or using monetary policy to improve  their internal economic dynamics. Japan is in reality just catching up in terms  of quantitative easing.

Japan intends to export its deflation and, with the approval of the economic  cognoscenti, it is going to do so in a manner and to an extent that the world  has never experienced before. The old …]saying] of “in for a dime, in for a dollar” will be the rule of the day. Japan cannot back down without suffering massive financial upheaval. I think they are likely to suffer no matter what they do,  but this is the path to suffering they have chosen. So be it.

[Japan is showing that highly aggressive central bank actions can work beautifully in the short term but what happens in the long run some may ask? Don’t worry about that, because as Keynes famously pointed out, “… this long run is a misleading guide to current affairs. In the long run we are all dead.” from this excellent article entitled BOJ says party on – in the long run we are all dead.]

All we can do is try and stay off the dance floor when the elephants are dancing or find a  really good dance partner who knows the moves and follow! This will not be an  environment in which to take dancing lessons…

I can’t with any reasonable certainty tell you how all this will play out, as we are simply in uncharted territory, but I do know I want to own assets that central banks can’t print. Their actions will affect those assets, to be sure – we are going to see more volatility than we would like, but that creates  opportunity.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.mauldineconomics.com/frontlinethoughts/the-mother-of-all-painted-in-corners#damn

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