Hedge fund manager Kyle Bass says on cnbc that Japan will face a debt crisis:
“Greece will circle the drain and be ungovernable in the next 30 to 60 days,” said Bass, founder of Heyman Capital and famous for presciently shorting subprime mortgage bonds before the industry collapsed. “Japan is in the crosshairs of the market…I’ve never seen more mispriced optionality in my entire life.”
“The fact of the matter is this is no longer an exercise in quantitative analysis,” he said. “It’s a question of when, not if.”
“Madoff taught us something,” Bass said. “You can make promises for a long time as long as you don’t have to live up to them.”
Demographics in Japan are horrible. The average age is increasing at an alarming rate and the culture of entitlements are causing enormous deficits. Eventually something will have to give. You can distort the financial economy all you want, but the fact of the matter is that Japan needs people to care for its elderly, but the birth rate is falling and immigration is minimal, so unless they invent robots to care for their aging population and free energy to power the robots and grow their food and produce the necessities of life, they can print money and keep borrowing, but the net result is inflation not production and services to deal with their poor demographics and scarcity of natural resources.
In this presentation Katsenelson tells us why Japan is past the point of no return. To put it simply, Japan is freaking doomed. Okay, I may be exaggerating just a little. But consider this:
- Japan’s GDP seems to have stopped growing.
- Japan’s budget deficits have continued to increase.
- Japan’s solution to zero growth is cut taxes, increase spending and borrow more money. It has done this repeatedly. If it doesn’t work once, maybe it will work if we do it again…and again???
- Japan can no longer keep funding its debt internally. Its population is getting old and starting to spend down their savings in retirement rather than saving more. (But I suppose it can print more Yen to buy debt.)
So what can Japan do?
It could raise taxes, but this will hurt the economy. And who wants to pay more taxes?
It could cut spending, but this will also slow the economy. And everyone wants to keep getting their piece of the government pie.
It could print Yen to continue spending and to buy JGBs to keep rates low. But a weaker yen harms their ability to import energy. With the shutdown of their nuclear plants they need to buy a lot more energy.
So what are the implications?
Japan is freaking doomed. Ok, maybe not but things are not going to be easy. It will probably accomplish things through a mix of these actions. It will raise taxes a little, cut some spending, print a little yen and probably let interest rates rise a little. Times will get tougher, but they will eventually pull through.
Japan – Past the Point of No Return – By Vitaliy Katsenelson