There comes a point when debt becomes so great, that the government has to do the unthinkable. Japan has reached that point. With their version of Quantitative Easing announced just recently, their goal now, is to press the reset button on the economy. All those debts measured in trillions of Yen are easily paid back if quadrillions of yen somehow magically appeared out of thin air. And that is essentially what they have committed themselves to doing. And if there were no side effects from it and it worked according to plan, it might have a chance of succeeding. Naturally, however, there are always consequences, unintended consequences, and then Murphy’s law.
The easily predictable consequence, is that not only do debts get wiped out, but savings get wiped out as well. Everybody who was prudent and worked and saved money their whole lives, will then have very little to show for it. This is especially true in Japanese society today, where few savers have been investing the nikkei market, which has dropped 70%+ over the past 20 years. The majority of savers have been in Japanese bonds, which are likely to tank even further as more and more Yen get pumped into the system. So these savers get a double whammy. Loss of capital on their JGBs, and loss of purchasing power on whatever they have left.
The unintended consequences are much more difficult to predict, but guesses can be made. If the older generation’s savings are going to be wiped out, the government is likely to front more of the bill for their version of social security and Medicare. This, of course, defeats the entire purpose of the whole experiment, as the debt doesn’t go away. You simply just have more people you have to take care of. Hence, the only way out of that – is to then dump another 2 quadrillion on the market. Hence, a self perpetuating cycle of inflation creating more inflation. Just ask Zimbabwe, Venezuela, or Argentina if dumping more money actually got them out of their debt problem.
Murphy’s law, which is the 3rd thing that will happen with this experiment, is the most difficult thing to predict. Mostly these are not possibilities, but questions we must ask. What if inflation doesn’t take? What if the banks hoard all the Yen just like the banks in the US are doing? What if people lose confidence in the Yen? What happens if the JGB doesn’t fall steadily, but instead, drops like a rock? Many of these scenarios are not just likely, but probable, and carry their own set of consequences, unintended consequences, and Murphy’s law issues with them.
And I ask myself, as a young, ambitions entrepreneur at the age of 34, would I want to live in Japan. The answer here is both terrifying and certain. I feel really bad for the Japanese equivalent of me. I don’t know that there is much chance for him.
I don’t always look at Japan with sorrow, but when I do, I feel really sad