The Future of America Is Japan

Runaway Deficits, Runaway Debts

by Charles Hugh-Smith

If you want a look at the fiscal future of the U.S., look west to Japan, a nation that sits precariously on a fiscal cliff a thousand feet high.

If you want to know how the Keynesian Cargo Cult's grand experiment in borrowing money to fund bloated fiefdoms, rapacious cartels and bridges to nowhere ends, just look west (from California) to Japan. The Japanese State, partly because they seem to believe in the Cargo Cult, and partly to avoid exposing the insolvency of their crony-capitalist financial sector, has been borrowing and spending money on a vast scale for two decades.

The Keynesian Cargo Cult's primary article of faith is that borrowing and blowing huge sums of money on anything and everything will magically restore "aggregate demand," i.e. the animal spirits that drive people to borrow and blow money on consumption. This is of course pure insanity, as people cannot borrow if their balance sheet has been destroyed, their real incomes are declining and they have lost trust in institutions that fear transparency and the truth like the Devil fears garlic.

Recall that the Federal Reserve's Survey of Consumer Finances for 2007-2010 found that the median net worth of households fell a staggering 39%, from $126,400 to $77,300, and average household income fell 11% from $88,300 to $78,500.

But rather than face the fraud and corruption at the heart of American (and Japanese) finance and governance, the Keynesians just want to leave the predatory, parasitic crony-capitalist Status Quo intact and create an illusory world of bogus "demand" and grotesque malinvestment funded by ever-increasing debt. In effect, the entire Keynesian Project seeks to reinflate asset and government revenue bubbles--the very causes of the global financial meltdown.

Let's see how the Keynesian protection of a corrupt, parastic Status Quo and pursuit of monumental malinvestment has worked for Japan. Here is the Ministry of Finance'sHighlights of the Budget for FY2012 (via Andrew P.). Consider the ramifications of these numbers:

REVENUES: 90,334 (billion yen)

Tax revenues: 42,346
Other revenues: 3,744

Government Bond Issues (borrowing): 44,244

EXPENDITURES: 90,334

National Debt Service (interest): 21,944

Social Security: 26,390

Other: 42,000

So interest on the debt and Social Security are 114% of tax revenues. Put another way, tax revenues don't even cover interest on the runaway debt and Social Security costs.

An amazing 49% of the governments budget is borrowed money. Even with near-zero yields on Japanese government bonds (less than 1%), 52% of tax revenues are spent on national debt interest.

Recall that the interest rate Japan's government is paying on its stupendous debt is about 1%. Were that to double to a mere 2%, all of the new debt would go just to pay the interest on existing debt.

This is truly the Red Queen's Race. (Losing the Red Queen's Race - February 17, 2010) And it's been going on a long, long time. Japan's budget/borrowing imbalance was already severe a decade ago when I wrote this: Japan's Runaway Debt Train (2001).

Since 2005, annual borrowing has increased 10,000 billion yen (BY) while expenditures rose by 8,000 BY. Tax revenues have been stagnant at 44,000 BY while the interest expense has risen 19% and Social Security costs have increased by 29%.

 You see what's happening: tax revenues are unchanged from seven years ago while interest and Social Security costs increase dramatically as the debt inexorably expands and more retirees qualify for Social Security.

Now take a look at the 2012 United States federal budget. Net interest on the $16 trillion national debt is "only" $242 billion, while Social Security costs totaled $778 billion. So far, debt and Social Security ($1 trillion) are "only" 40% of total tax revenues, but like Japan, rapidly rising debt will increase interest while a rapidly increasing population of retirees qualifying for Social Security will drive those costs dramatically higher in the years ahead.

Given $2.47 trillion in total tax revenues, $3.8 trillion in expenditures and a deficit of $1.3 trillion, 34% of the Federal budget is borrowed money. We are borrowing 52% of total tax revenues.

Does anyone seriously think this is the "road to recovery"? If you want a look at the fiscal future of the U.S., look west to Japan, a nation that sits precariously on a fiscal cliff a thousand feet high.