Debt outpacing growth and the case of Japan(Read article summary)
Japan couldn't trick its way out of an economic meltdown, and neither can the US.
Get out your chopsticks! Brush up on your sushi! Learn to read backwards and upside down!
Yesâ€¦weâ€™re going to Japan!
The gist of the Japanese situation is this:
The bubble burst in 1990. But rather than let their big businesses go belly up, the Japanese used every trick in the book. Counter-cyclical deficits up the Shinanho. ZIRP (zero interest rate policy). And QE too.
The economy didnâ€™t grow. It didnâ€™t collapse. It just got stuckâ€¦like a moth in amber. No new jobs. No new output. And get this, Japan is expected to lose 40% of its working age population by 2050.
Growth is expected to be negligible over the next 40 years in Japan. But it will be almost nothing in many other countries too, according to an HSBC report. It estimates that the US will grow at around 1.5% annually. France 1.1%. Denmark, Norway, Sweden â€” barely anything at all.
What does this sound like to you, dear reader? It sounds like the whole developed world going Japanâ€™s way â€” with low growth and high debts from here to eternity.
Growth is stalledâ€¦debts are mounting up. Hello Tokyo!
But waitâ€¦hereâ€™s the Congressional Budget Office telling us that Congress will have those deficits under control in no time.
â€śDeficits to fall sharply, US forecast says,â€ť reports the International Herald Tribune.
What a relief that is! The CBO has crunched the numbers. It has beaten up the 2s. It has punched out the 5s. It has pounded the 6s. And now, finally, like prisoners at Guantanamo, the numbers tell us what we want to hear.
US debt is going down!
Wait a minuteâ€¦are these the same number crunchers who, at the beginning of the 21st century, forecast federal surpluses as far as the eye could see?
Yes, it is!
But, okay, that didnâ€™t work out exactly as planned. They crunched the numbers but then the numbers got un-crunched on their own. Damned numbers! You just canâ€™t trust them.
So, how can we trust these numbers?
Thatâ€™s just it, dear reader, we canâ€™t. In order to work out as planned, they require:
1. Congress has to let the Bush tax cuts expire on schedule. Hmmmâ€¦ Will that happen? Beats us. It probably depends on who wins the elections in Novemberâ€¦which probably depends on what the economy does between now and thenâ€¦which probably depends on more things than we can begin to estimate and compute.
But the central idea of it â€” that Congress will act responsibly â€” seems like something you canâ€™t say with a straight face. Will pandas stop eating bamboo? Will teenagers stop slouching? Will liquor stores make free home deliveries? Nope. Everything has a nature of its own. And the nature of Congress is to spend money it doesnâ€™t have on things it doesnâ€™t need. And then to push the bill onto the next Congressâ€¦the next administration and the next generation.
2. Not only do taxes have to go up, so does economic growth. Thereâ€™s a problem right there. According to prevailing theories, if you increase taxes during a de-leveraging spell, you donâ€™t get faster rates of GDP growth. You get slower growth.
The CBO acknowledges this problem, to a degree. It allows as how unemployment may go up, thanks to the tax increases. In fact, they say it will go to 9% in 2013.
How will the President, Congress and the Fed react to rising unemployment? Mightnâ€™t it tempt them to engage in a little more counter-cyclical stimulusâ€¦at the expense of the tax cuts?
And what happens to growth rates? The CBO figures that growth can outstrip deficits. Maybe. Maybe not. Now, itâ€™s not even close. Thereâ€™s a $1.1 trillion deficit this year. Growth? Maybe a fifth of that. In other words, debt is growing 5 times faster than the economy.
During Mr. Obamaâ€™s first (and maybe last) term, US debt will grow by more than $5 trillion. Another term like that and weâ€™ll be over $20 trillion.
And already the weight of debt is pressing down growth ratesâ€¦and itâ€™s getting worse.
And if HSBC is right, US growth will be very slow. Will deficits also be very low? Below 1.5% of GDP? Down from over $1 for the last 4 years to under $225 billion for the next 40?
Heck, weâ€™re as soft-headed as anyone. Weâ€™d like to see the whole problem go away too. And maybe it willâ€¦
But we wouldnâ€™t bet on itâ€¦
Â for The Daily Reckoning