Japan’s Population is Aging just like in Europe and the U.S., Deficits and Debt may soon be Unsustainable

Posted by PITHOCRATES - February 19th, 2012

Week in Review

Liberal Democrats have never worried about the long-term consequences of high government spending.  High deficits.  And growing debt.  And their ‘go to’ example they like to go to is Japan.  During the Eighties government partnered with business.  Their economy boomed.  And they started buying up U.S. landmark assets.  People began to worry that Japan would one day own the United States.  National Lampoon magazine had a cover showing a Japanese executive as the president of the United States, a wholly owned subsidiary of some Japanese corporation.  Liberals looked at all of this and said that’s how you run an economy.  And the Americans were fools for not doing the same thing.

Then the Nineties came.  And a deflationary spiral that continues to this day.  All of that government interference with the market created bubbles.  And they eventually burst.  But as their economy contracted they did not cut back on their government spending.  Which brings us back to Japan being the poster-child for liberal Democrats.  “See?” they say.  “Japan has some of the highest government spending in the world and they’re doing just fine.  Japanese debt is some of the safest debt out there.  So we don’t need to worry about high deficits or high debt.  Because it’s not harming the Japanese any.”  But that may be changing soon (see Japan slowly wakes up to doomsday debt risk by Reuters posted 2/19/2012 on the Vancouver Sun).

Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks — that is what Japan may have to contend with if it fails to tackle its snowballing debt…

The government borrows more than it raises in taxes, and its debt pile amounts to two years’ worth of Japan’s economic output, the highest debt-to-GDP ratio in the world.

It costs Japan half of the country’s tax income just to service its debt. Each year, Japan’s debt level increases by more than the combined gross domestic product of Greece and Portugal…

Conventional wisdom is that Japan is safe as long as it keeps covering about 95 per cent of its borrowing needs at home…

What sets Japan apart from Europe’s crisis-hit nations is that it borrows almost exclusively at home and with domestic savings of some 1,500 trillion yen ($19 trillion) it can do it paying less than one per cent for 10-year bonds…

Budget arithmetic and demographics suggest that it will take another decade before Japan’s swelling ranks of retirees will begin to run down their vast savings to the point where Tokyo will need to start borrowing more from overseas lenders…

… Over decades of virtually single-party rule, Japan developed a system where expertise and formulation of policies would be the domain of elite bureaucrats rather than elected politicians…

Sakuma estimates the sales tax would need to go to 25 per cent or more to close the financing gap built up over the past 20 years when Japan failed to respond to rising costs associated with rapid aging by adjusting taxes and social security premiums.

Even tax hikes on such a scale will fail to reduce the debt burden if Japan remains stuck in deflation and anemic growth, he warns. “If we stay in this situation, this amount is never repayable. It’s just impossible…”

The problem Japan is having is the same problem Europe is having.  And the United States.  We all have aging populations.  Because we all also have a declining birth rate.  We have fewer people entering the workforce than we have leaving the workforce.  And that’s a problem when you provide a lot of government benefits.  Especially in retirement.  Such as pensions.  And health care.  Because you pay for benefits with taxes.  And you collect taxes from working people.  And when fewer people work guess what?  Tax revenue falls.

These government benefits were set up in a time when there were low tax rates.  And when people were having a lot of babies.  But as government gave out more benefits taxes went up.  It became more expensive to live.  And to raise a family.  So people had fewer babies.  And long story short we are where we are today.

Japan had some of the highest saving rates in the world.  Which has allowed them to build up the highest debt-to-GDP ratio in the world.  Well that.  And elite government bureaucrats.  Who were so smart that they knew what they were doing.  Just like liberal Democrats in the U.S.  And their counterparts in the social democracies of Europe.  They are so smart that they, too, want to run their economies.  And here we all are.  Countries with elite bureaucrats running their economies.  All facing some level of economic and financial collapse.

Perhaps it’s time to go back to first principles.  To Adam Smith.  And John Locke.  Put the people back in control of the government.  Get the government out of the economy.  And let the invisible hand do its magic.  Like it did before elite government bureaucrats mucked everything up.

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The Muslim Brotherhood cracks down on pro-Democracy Groups in Egypt

Posted by PITHOCRATES - February 19th, 2012

Week in Review

So how is that Arab Spring going?  Well, if it was a democracy movement, not too good.  But if it was an Islamist movement, none too bad (see Egypt’s Muslim Brotherhood backs military in dispute with US over pro-democracy groups by the Associated Press posted 2/15/2012 on The Washington Post).

Egypt’s Muslim Brotherhood on Wednesday threw its weight behind the country’s military-backed government in an escalating dispute with the U.S. over the funding of pro-democracy groups.

Cairo claims that the groups are fomenting protests against the country’s military rulers, and has referred 16 Americans and 27 others to criminal court. Six Americans are barred from leaving the country.

Funny.  The Muslim Brotherhood came to power in a pro-democracy movement.  The so-called Arab Spring.  Helped in part by President Obama.  Who told Hosni Mubarak that he had to go.  Is now trying to clamp down on pro-democracy groups.  And is imprisoning Americans.  Guess the meaning of democracy changes with time.  And one person’s democracy is another’s enemy of the state.

The Brotherhood’s political party swept recent elections, taking nearly 50 percent of the seats in the new parliament. Liberal and secular activists who led last year’s popular uprising that toppled Mubarak failed to win significant strength in the parliament, and they are suspicious of the Brotherhood, suspecting that the veteran Islamist movement is working with the military to divvy up power while excluding the more secular forces.

Funnier still is that the people who overthrew the Mubarak government have no say in the new government.  Who would have seen that coming?  Other than those who know history?  And warned that Egypt may very well go the way of the Iranian Revolution?  Which it sort of looks like it is.  Time will tell.  Sadly for the people of Egypt.  For democracy in the region.  And especially for Israel.  Who the Muslim Brotherhood really, really hates.  And all of this going on while Iran is going nuclear.

Could be a sad time for the world.

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Japan Oil Imports increase and Exports of Manufactured Goods decrease resulting in First Trade Deficit in 31 Years

Posted by PITHOCRATES - February 19th, 2012

Week in Review

Japan sets another record.  The country that once could do no wrong in its export market sees its first trade deficit in 31 years (see Japan logs record trade deficit in January by Rie Ishiguro posted 2/19/2012 on Reuters).

Japan posted its biggest ever trade deficit in January…may undermine the country’s ability to finance its debt.

The trade deficit stood at 1.475 trillion yen ($18.59 billion), against median market forecast for 1.468 trillion yen, marking a fourth straight month of deficit, as weak global demand and a strong yen hurt exports and robust fuel demand boosts imports.

Japan doesn’t have a lot of oil.  They have to import most of it.  And as domestic oil demand rises and demand for their manufacturing exports fall their trade deficit increases.  If Japan had more domestic oil fields to exploit they probably wouldn’t have a trade deficit.  Even with their falling exports.  

You know, I can think of another country with a trade deficit.  Who has a far greater land mass than Japan.  And far more coast line.  With who knows how much oil beneath.  And they, too, have an oil-thirsty economy.  But they, too, import most of their oil.  Not because they have no other choice.  But because of anti-oil policy keeping that oil undiscovered.  And unrefined.  Can you name that country?  Here’s a hint.  Its initials are U.S.A.

The Obama administration stimulus of 2009 saved millions of jobs.  Though there is no way to actually measure this the administration claimed it nonetheless.  Because they have a magical crystal ball.  Just like the one I have.  And when I look into it I see remarkable things.  In particular I see the future where we exploit our domestic oil reserves.  In that future there is a trade surplus.  Millions of jobs saved.  And millions of new jobs added monthly bringing the unemployment rate below 5% (i.e., full employment).  A federal budget surplus.  A triple-A credit rating from all the credit rating agencies.  A strong U.S. dollar.  And a very low inflation rate.  A nice future.  A very nice future indeed.  And a future that can be supported by the math.

If we bring new domestic oil to market all of these things will happen.  How do we know this?  Because when we bring less domestic oil to market the exact opposite happens.  As the Obama administration has proven by their policies.

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Even with Large Subsidies Electric Car Sales are Anemic

Posted by PITHOCRATES - February 19th, 2012

Week in Review

Building electric cars was going to provide high-tech and well-paying jobs.  At least, that was the plan (see Electric-car subsidies would to go to automakers by Chris Woodyard posted 2/15/2012 on USA Today).

There would be a maximum $10,000 [subsidy] per vehicle through 2016, with no cap on how many vehicles it might apply to; that would drop to $7,500 in 2017, $5,000 in 2018 and down to $2,500 in 2019…

Sales of the Leaf and Volt have lagged behind initial sales estimates.

How you like to get a $10,000 credit on a $40,000 SUV?  That would be a nice savings.  On something you would want.  But these electric cars?  Even with government subsidies no one is buying them.  Which is the only upside.  If no one is buying these things at least it will keep government spending for these subsidies next to nothing.

Why is no one buying these electric cars?  Range anxiety.  That SUV will always get you home.  Unlike an electric car.  If you run out of charge and coast into a grocery store WITH a charging station you won’t be driving home.  At least, not for many hours.  Until that battery is charged.  (Unless you have a hybrid like the Chevy Volt with a backup gasoline engine.)  But if your SUV runs out of gas you could always pour in a can of gas.  Then drive to a gas station to fill up.  And then drive wherever you want to go.  Day or night.  Summer or winter.  Snug and safe in your gasoline-powered SUV.

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Some say the Germans should Remember that Austerity gave them Hitler and should therefore Forgive some Greek Debt

Posted by PITHOCRATES - February 19th, 2012

Week in Review

There are more Nazi comparisons in the continuing saga of the Greek debt crisis as people keep picking on Germany.  The strongest Eurozone state.  And the only one who can bail out the weaker ones (see Germany has forgotten the lessons of war reparations by Jeremy Warner posted 2/17/2012 on The Telegraph).

While on the subject of historical parallels, there’s another which has not yet been given sufficient an airing. This was the vexing question of German war reparations after the slaughter of the First World War, brilliantly identified by John Maynard Keynes at the time in his polemic, “Economic Consequences of the Peace”, as fundamentally unfair on the Germans. Keynes branded the Treaty of Versailles a “Carthaginian Peace”.

True.  The Treaty of Versailles did treat the Germans unfairly.  A word commonly bandied about at the time in Germany was humiliated.  And betrayed.  Even stabbed in the back.  Because the Germans didn’t start that war.  Everyone was eager to go to war.  And nearly everyone did thanks to those entangling alliances that George Washington warned us about.  And another thing.  The Germans didn’t lose the war.  No one did.  And no one won the war.  It ended in an armistice.  Much like the Korean War.  And yet during the treaty process they identified Germany as the sole culprit that caused the war.  And the allies all tried to recoup their losses and rebuild their empires by bleeding Germany dry.

Part of Germany’s purpose during interminable attempts to renegotiate these debts on less oppressive terms was to demonstrate that the German economy was in no position to pay – ergo, the creditor was at some stage going to have to take an almighty hit. Indeed, it is sometimes argued that the Weimar hyperinflation was deliberately engineered in order to demonstrate this fact beyond doubt. There can be no other explanation for the bizarrely ruinous policies of deficit financing pursued by the Bundesbank at that time. No sane central banker could possibly have sanctioned such a strategy…

Given its history, it is quite strange that Germany has such difficulty in grasping this reality. It is sometimes said that German attitudes to the economy and the current crisis are instructed by experience of Weimar inflation and its catastrophic consequences. Yet it wasn’t hyperinflation that brought Hitler to power, but rather the depression of the early 1930s, which in Germany’s case was greatly exaggerated by the pro-cyclical austerity the government of the time insisted on applying to the problem. Those who who [sic] don’t learn from the past are doomed to repeat it.

The Weimar hyperinflation played a part.  But what really motivated Hitler was the Versailles Treaty.  Hitler was a veteran of WWI.  He served bravely.  Was promoted to corporal.  Suffered temporary blindness from a gas attack.  And he knew the Germans weren’t beaten.  Exhausted?  Yes.  War weary?  Yes.  But militarily defeated?  No.  It was the humiliation of the Versailles Treaty that drove Hitler.  So much so that when his panzer armies conquered France he met the French in a special rail car to sign the instrument of surrender.  The same rail car the Germans signed the humiliating Versailles Treaty.

Many Germans rallied around Hitler because they felt the same way.  Germany had grown to be the dominating European power.  And that treaty did what Germany’s enemies couldn’t do.   Change the balance of power in Europe.  To reverse the German successes of the last century or so.  This is what brought Hitler to power.  Vengeance.  To right the wrongs done to Germany.  Had they not been so wronged it is unlikely that a gifted orator would have risen to inflame the masses.  For there may have been no hyperinflation without those punishing reparations in the first place.  And without that economic crisis the world wouldn’t even know the name Adolf Hitler.  (Probably.  Unless a prosperous Weimar Germany liked and bought his art.  Then instead of remembering him as a crazed mass murderer we would remember him as an artist.)

In contrast nobody wronged Greece.  They got into this mess on their own.  By irresponsible government spending.  And the cure for irresponsible spending is responsible spending.  Not forgiving debt so they can keep spending irresponsibly.  German hyperinflation resulted from unjust war reparations that destroyed the German economy.  The Greek crisis resulted from irresponsible spending that destroyed the Greek economy.  Spending is the problem.  It needs to be cut.  So they stop running deficits.  And stop growing their debt.  But cutting government spending is easier said than done.  For once the government makes the people dependent on government benefits the people tend to not want to give them up.  But they must.  It’s the only way to fix the underlying problem.  Irresponsible spending.  And forgiving debt not only misses this central point.  It encourages more of the same.

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The Late Kim Jong-il gets a Statue while the North Korean People go Hungry

Posted by PITHOCRATES - February 19th, 2012

Week in Review

Kim Jong-il may be dead.  But he will live on in the hearts and minds of the North Korean people.  Or else (see Giant Kim Jong-il statue unveiled for his 70th birthday posted 2/14/2012 on BBC News Asia).

A giant statue of Kim Jong-il has been unveiled ahead of Thursday’s celebrations of the 70th anniversary of his birthday…

He reportedly shunned the idea of the bronze statue in his lifetime, said the BBC’s correspondent in Seoul, Lucy Williamson.

According to various accounts, Mr Kim reportedly told state officials in 1999 that he was not ready for the adulation before fulfilling his promise of building an affluent society, the Associated Press reports…

The country is believed to be planning widespread celebrations on Thursday, also dubbed “the day of the shining star”, even as worries continue over food shortages in the country, our correspondent said.

Good thing, then, that Kim Jong-il didn’t erect a statue of himself during his lifetime.  Because he didn’t have a snowball’s chance in hell of building an affluent society.  For there’s never been an affluent Stalinist society.  It’s old school hardcore communism in North Korea.  The kind where they shoot you down if you try to escape their communist utopia.  Doesn’t exactly bring out the entrepreneurial spirit.  Or fill you with bliss.  Rather, it tends to fill one with fear and dread.  And hunger.

By contrast the countries where the people are most blissful and least hungry are the capitalist countries.  Where the entrepreneurial spirit thrives.  Which enthralls and entices the people in the communist utopias.  Encouraging some of them to escape their lives of fear and dread.  Even though they may be shot down in the process.

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