Monday, December 26, 2011

Karl Denninger, "The Path We Are On"

"The Path We Are On"
by Karl Denninger

Dec. 26 (Bloomberg) - "Prime Minister Yoshihiko Noda faces escalating pressure to secure support for higher taxes after Japan’s budget plan for the next fiscal year showed a record dependence on borrowing. The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction."

Oh, you mean like us?  A budget gap of some 40%, all-in, our legislature raiding Social Security funds to try to make the numbers look better and avoid cutting spending?

Does anyone remember when the Nikkei was pushing toward 40,000 and everyone thought happy days were here forever?  Then growth collapsed upon itself, government social spending did not decrease, and the market entered a period of fits and starts, yet today, some 20 years later, the Nikkei stands at 8,400 - and never saw a "3" handle, say much less the vaunted "4" it was reaching for - again.

Why? Simple, really.  Government spending never came down.  Deficits never were cut.  The premise of "growth" was maintained as the foundation of economic policy, yet infinite exponential growth is impossible, whether it is growth in spending or growth in economic output.  It simply cannot happen because the land mass on which we live is finite and so are our resources.  While compound growth can go on for quite a while, it has an endpoint that must be accepted.

The "solution" taken when the "growth" mantra failed was financial repression, which in turn destroyed capital formation.  And now, with that having failed and near zero interest rates for more than a decade failing to revive that which was mathematically impossible, the demand is being heard to raise taxes instead of realigning the government to that which can actually be paid for. In short the Japanese got fat, dumb and happy off government heroin.  Instead of acceptance of reality - that one cannot spend more than one makes - the people demanded more and more, and the government bought their votes with fiscally bankrupt policies.

Now the day of reckoning is at hand.

Should Japanese bond interest rates rise, the government will be instantly bankrupted.  Yet if the government tries to continue to run budget deficits of this sort, it will bankrupt itself one way or another.  Further repression means destruction of the standard of living through amazing rates of inflation, and since all such games are negative-sum, while this "works" in nominal terms it does exactly nothing for the people in real (purchasing power) terms. Pay attention folks, because this mess is coming here, and soon."

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