What Would You Do?

Defaulting Or Hyperinflating

About a month ago, Kenichi Ohmae of Japan put out this column here (it's in Japanese, unfortunately) pointing out that there are only 2 real options for Japan if it can't fix its budget deficit. Since then of course the credit rating for Japan has been downgraded, and this year's budget is headed for more of the same as previous years which is only going to make things worse.

The more recent column by Kenichi Ohmae (again, it's only in Japanese), goes through just how screwed the Japanese budget is, given that more than half of the budget is going to be funded from bonds. In a sense, if the budget is about 5-6times the actual income of the government. The debt is AUD$7.077 trillion, while the annual government expenditure is looking about AUD$1.774 Trillion. More than half of that latter figure is going to be funded from bonds - which will dutifully be bought by the Japanese.

The point Ohmae makes in his recent column is that the Consumption Tax necessarily has to be raised from 5% to about 30%, and even then the government barely has a shot at paying the interest on the bonds. It has to cut expenditure by half (!) to be able to pay off the principle; all the while trying to look after its welfare obligations. As it stands, the Democrats in Japan under Naoto Kan don't seem to have a chance of raising the Consumption Tax to 10% which is not even close to being enough; and there are no real cuts being mooted, which in turn means Japan won't be able to meet its debt payments, leading to a default.

The other option is of course to print money and hyperinflate away the debt, which is another way of the government to seize hold of the savings of everybody to pay off its debts. Either way there's going to be a furor, but judging from the headlines in Japan, it's hard to see anybody being able to make any decision that won't lead to a default or hyperinflating away the debt. The ramifications of this for the world are going to be really interesting to say the least.

It's a sad state of affairs that the opposition Liberal Democrats who presided over the economy for 60 years with the bureaucrats of the Treasury created the problem, so it's strictly not just about the Democratic Party that is being questioned. Ohmae is essentially demanding an apologia in the face of the final judgment of the marketplace, but really, how worried are people in Japan? Ohmae thinks that everybody is so used to talk of the crisis without feeling its impact, they've become inured to it, which is not a good thing.

Yet, if Japan defaulted and did what the Argentinian Government did and paid 30cents in the dollar, there would be riots to rival Tunisia, Egypt and Lybya. Which leaves hyperinflation as the more probable option. Ohmae observes that the idea there would be to write down debts by destroying the value of the debt, taking with it everybody's financial assets. The nation is essentially commandeering everybody's savings in Government Bonds. it's an ugly business. It would only be then that the people would realise that it would have been better to have paid the extra tax so the government could pay off the debts, but it would be way too late by then.

Talk about the devil and the deep blue sea.