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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