Category Archives: National Debt

The Japanese Economy: Harikari in Slow Motion

Motivated by three recent articles by Zero Hedge and Mike Shedlock: In Shocking Finding, The Bank Of Japan Is Now A Top 10 Holder In 90% Of Japanese Stocks, Bank of Japan Owns Over Half of Japanese ETFs; Why Stop There?, and Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less, we decided to take a closer look at the Bank of Japan (BoJ), particularly its balance sheet.

There is widespread agreement that this will end badly. No one, however, has any idea whether it blows up this month, this year or whenever. In this article, we explain the the nature of the problem and possible signs of the tipping point being reached. When it does blow, the shock waves will cascade through all economies.

Some Thoughts on Debt Saturation and Growth

We recently received multiple references to this chart:

This one from Joe Miller (attributed to a David P.) was accompanied by the statement:

Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to “grow our way out of debt” is not supported by data.

Although we intuitively believe the author is right, we do not think he has proven his point. We discuss the post and explore our thoughts on the topic.

Debt Deleveraging: Where We’re At

The problem that the world finds itself in is widely acknowledged to be a problem of debt and insolvency. Until now, most of the solutions attempted have been to fix problems of liquidity arising from the debt problem without attacking the underlying debt problem. Indeed as we write, we watch the ongoing futile European attempt to fix over-indebtedness and insolvency by exerting ever effort to prevent capital loss as a means of deleveraging.

McKinsey & Company published a report this week titled “Working out of debt“. Their report acknowledges that deleveraging is necessary, shows where we are in the debt deleveraging cycle and discusses what is necessary for the world to try and grow its way out of debt.

What follows is a presentation of their key points with our comments. The reader is referred to our many other posts, on debt, particularly our 4-part series on money starting with “Understanding Money: Part 1 – Introduction” and our post “Has the Thief Been Caught?” in which we posit that excessive debt reduces future growth, an effect that is already well underway.

Understanding Money: Part 4 – The Value of Money

Money and Value

As discussed in Understanding Money: Part 1 – Introduction when nations’ currencies were made of precious metals, the actual value of the currency was carried by the currency itself. It had intrinsic (see next section for a discussion on intrinsic value) value. For a gold coin, the measure of its value was the amount of gold in it. The value of gold as a metal is due in a large part to its scarcity and associated cost of production.

If a bushel of wheat were our commodity currency, we could plant more acreage. For gold, it takes an immense amount of money to find and develop new deposits. It takes years to develop a new deposit before the first ounce of gold is poured. So the supply of gold is what economists term as inelastic. It can’t readily be increased to meet demand. Today, the commercial producers that own significant deposits have a production cost of around $1100 per oz. So its minimum price or value is its cost of production.

Have you noticed that very few people have enough money? This is particularly true of sovereigns – monarchs and governments. A key aspect of a sovereign is it’s control of the money supply. A sovereign may control the ownership of all gold production but it cannot control the amount of production to any degree. What is a poor sovereign to do when it wants more short of stealing another sovereign’s gold through warfare? Fiat or paper currency to the rescue.

Eurozone debt web: Who owes what to whom?

This is the link to an interactive graphic showing the complex web of debt obligation in the eurozone as well as with Japan and the US. Clicking on a country name causes arrows to appear whose width and directions indicate to who the debt is owed and the relative size. As a country is selected, numerical statistics on the debt are also presented.

A secong graphic of the European debt web was published by the New York Times, October 22. To see it, click on the image and a re-sizable version will open. It is available as an interactive graphic online.


It should be noted that this is foreign debt, not government or sovereign debt which may be a component of foreign debt. As a result, the foreign debt of a country is considerably higher than the government debt in most cases. Japan is an anomaly as most of its sovereign debt is held internally by its people. The US is about even. Ireland’s debt situation is astronomical compared to other countries.

As Zero Hedge notes, debt is a bilateral instrument. It is a liability to one party and an asset to the counterparty. Net foreign debt would be the result of taking into account both monies owed and monies lent but is not given in this case. Any serious study of the graphic should be accompanied by reading the notes appended to it.

Sources of Data On National Debt

There is a site called the Joint External Debt Hub (JEDH), jointly developed by the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) and the World Bank (WB) to consolidate data on national debt.

The Economist magazine has published an interactive global map that allows one to click on any country and receive information on the country’s gross public (government) debt.

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