“History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is simply declare bankruptcy, the other is to inflate the currency and thus destroy the wealth of ordinary citizens.” –Adam Smith
Today I read a great post on the future of Japan’s unorthodox monetary policies. It is so bad that the former chief economist of the IMF, professor Oliver Blanchard is now saying it will end in hyper-inflation. Here is the link if you want to read the whole article, but I will summarise below:
Basically the situation is as follows
1. Japan is spending more than it is earning as its aging demographics timebomb destroying its tax base, but it wants to pretend it is not getting poorer (saving face). It now has the highest government debt to GDP ratio in the world
2. The central government has tapped out all domestic sources of cheap credit such as the insurance funds and banks.
3. The central bank has stepped in and started buying up all new government bonds being issued, but indirectly through banks and insurance companies as this is the law in most developed countries. So at least there has been a buyer of last resort at a low interest rate to keep the government afloat. They have in fact driven interest rates into negative terrirtory recently.
4. Since 2014, when a new and massive round of QE was launched, the central bank has also been buying large amounts of already existing government debt that was on the books of the banks and insurance companies. This was designed to flood the markets with yen and drive down the currency so the country could remain economically competitive.
5. However, sometime soon they will run out of existing debt to buy (soak up) from commercial banks and insurance companies. The more they buy the less willing banks will be to sell what’s left due to their need for reserves as required by law.This will result in a further rise in interest rates an a retreat from the massive QE the central bank has been been injecting into the economy. There will be a financial drought for the government. It will also mean further rising interest rates as the government will have to tap overseas debt providers at a higher rate.
6. But they can’t tap foreign debt as it will bankrupt the government almost immediately due to its massive debt load, which cannot be carried at normal interest rates. This will be admitting the country is bankrupt, risking a huge economic catastrophe such as befell Argentina and Greece
6. At that point The only way to keep the show on the road and avoid this national and global catastrophe will be for the Japanese central bank to directly supply yen to its government in ever-increasing amounts, yen created out of thin air and added to an already bloated money supply. This will be a massive inflationary jolt to the economy. This is the Zimbabue, Venezuela and Weimar Germany option. No major economic power has ever done this in the modern era.
The illusion of normality was only going to last until the mainstream media caught on to the danger, and today England’s Daily Telegraph finally caught on…
It is now only a matter of time before the Japanese debt bomb explodes, destroying the global illusion of eternal debt fuelled prosperity and destroying the global economy with it.
Thus we come to gold, the ultimate inflation hedge. Can it be that the professionals are now eyeing a global inflationary disaster and positioning themselves appropriately? Holdings of gold in the worlds largest gold ETF have jumped over 20% in the last three months, an unprecedented rise after a four year bear market. Gold is up 16% for the year and is the worlds best performing asset this year. Something big has changed. Something big is coming.