“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
– Earnest Hemingway, The Sun Also Rises
[Special Reminder: In case you missed our recent announcement, The Essential Investor has merged with legacy contributors to Agora Financial. The new, larger, more inclusive project is called The Grey Swan Investment Fraternity. If you’re interested in the scope and benefits of our new endeavor, please see what prompted us to merge here. If you’ve been a member of The Essential Investor, please keep an eye out for your new benefits.]
June 5, 2024 – Today’s missive turns to Grey Swan Investment Fraternity member John Rubino. He’s noting the trouble Japan faces given its high debt load and rising inflation.
Japan’s woes have often come years ahead of those in other developed countries. During the 1980s, it seemed like Japan was going to take over the world with its growing financial prowess.
Instead, it peaked. After Japan’s Nikkei 225 index hit an all-time high on December 29, 1989, it took until 2024 to make a new one.
Could that be the fate of other Western nations facing high debt loads and the challenge of higher interest rates?
John lays out the choices Japan faces today, and which other nations will follow in the not-so-distant future.
Note that there are no good choices, only a chance to have a “least bad” outcome. Enjoy ~~ Addison
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Japan Death Spiral Update: Now Inflation Is Spiking
John Rubino, John Rubino’s Substack
Pretend you’re running a central bank and your primary job is to maintain a stable currency. Then assume that your long-term interest rates are around 1% and an important inflation measure is spiking to near 3%. What do you do?
Normally, you’d raise interest rates to one or two percentage points above the rate of inflation, producing positive real interest rates that encourage saving and discourage borrowing, thus slowing growth and bringing inflation back to a safe level.
But now assume that your federal government’s debt is 260% of GDP. Pushing interest rates up by another two percentage points will increase government interest costs by an intolerable 5% of GDP.
So you have two choices: Let your inflation run out of control (i.e., let your currency collapse) or protect your currency and bankrupt your government.
Well, here in the real world, that’s exactly the dilemma facing the Bank of Japan, and they don’t have any more answers than you did in the above hypothetical. Here’s an excerpt from a Wolf Richter report on the situation:
The producer price index for services that Japanese businesses buy jumped by 0.82% in April from March, after a similar jump in March from April, according to data from the Bank of Japan. On an annualized basis, both those jumps amounted to just over 10%.
In the data that exclude the consumption tax hikes in the past, the April spike boosted the year-over-year increase to 2.9%, the worst jump going back to 1991.
The fiscal year for Japanese companies begins in April, and many of them adjust their prices at this time, and a big portion of the month-to-month price spikes in March and in April were a result of companies jacking up their prices on services they provide to other companies. They’re now passing on their wage increases.
The services that contributed the most to the year-over-year surge in prices were:
- Civil engineering and architectural services: +7.5%
- Other technical services: + 5.9%
- Training and development services: +6.7%
- Machinery repair and maintenance: +5.5%
- Waste and industrial-waste disposal: +5.1%
- Software development: +4.5%
- Commodities inspection, non-destructive testing, and surveyor certification services: +5.4%
- Leasing of computer and related equipment, communications equipment, motor vehicles, etc.: +5.3%
- Hotels: +22.3%
- Ocean freight: +16.7%
- Domestic air passenger transportation: +10.1%
Businesses that pay for these price increases in services will pass them on to their customers. Wages are a big factor in services inflation. The BOJ has been pointing at inflation in services as a sign that inflation has been spreading throughout the economy – and it has been.
The Bank of Japan has more than enough inflation-related reasons to hike its policy rates with substantial rate hikes, not minuscule-type hikes of the kind it performed in March from negative 0.1% to 0%. Its refusal-to-hike policy in the face of rising inflation has caused the yen to plunge to about ¥157 to $1 currently, as it’s ultimately the currency that ends up dealing with these kinds of monetary sins.
So the yen has to keep falling?
If the alternative is a bankrupt government followed by a plunging currency, it would seem that the best of a bad set of options is to raise interest rates only modestly (if at all) and let the yen go where it goes.
In other words, welcome to the eventual fate of all fiat currencies. And welcome to the solution:
~~ From, Grey Swan member, John Rubino.
So it goes,
Addison Wiggin,
The Wiggin Sessions
P.S. Japan is just the proverbial canary in the coal mine. With high debt levels and high government payments, it’s no surprise that central banks continue to add to their gold holdings aggressively. Investors may want to use the recent dollar pullback in the metal to add to their holdings, and take some wealth out of fiat currencies.
P.P.S. In the June issue of the Grey Swan Bulletin, Mr. Rubino also helps us understand how modern governments go bankrupt – slowly then abruptly – and what that portends for the U.S. as we collectively endure the excruciating crisis of politics in Washington.
(How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt — all three books are available in their third post-pandemic editions.)
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at Amazon and Barnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
