LAND OF THE SETTING SUN

The linear thinkers that dominate the mainstream media and the halls of power in Washington D.C. are assessing the series of disasters in Japan without connecting the dots of history. Their ideological desire to convince people that things will go back to normal in short order flies in the face of the facts. It makes me wonder whether these supposed thought leaders lack true intelligence or whether their ideological biases convince them to lie. At the end of the day it comes down to wealth, power and control. If those in power were to tell the truth about the true consequences of demographics, debt, disasters, and devaluation, their subjects would revolt and toss them out. Before the multiple disasters struck Japan last week, the sun was already setting on this empire. The recent tragic events will accelerate that descent.

Japanese Beetle Meet Windshield

Smart financial minds have been expecting a Japanese economic tsunami for the last few years. John Mauldin described Japan’s predicament in early 2010:

“I refer to Japan as a bug in search of a windshield. I am not so sure about the timing, however, as the economic and fiscal insanity that is Japan may be able to go on for longer than many think possible. But to me it is not a question of whether there will be a crisis, but when there will be one. This year? 2011? 2012? I doubt Japan makes it to the middle of the decade with a very serious and sad day of reckoning.

The downside to the continuation of running massive deficits is that when the break does come, it will be all the more painful and difficult to deal with as the debt mounts. If there is an upside, it is for the rest of the world to see what can happen to a developed country like Japan when massive deficits are allowed to pile up one after another. It will be a morality play writ large upon the walls, which cannot be dismissed.”

Ambrose Evans-Pritchard expected a 9.0 debt earthquake to strike Japan in 2010:

“Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1% from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225% of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbor race to the bottom.”

Mr. Pritchard was either wrong or early, depending upon your point of view.

JAPAN INTEREST RATES

Japan can still borrow for 10 years at 1%. Despite the highest government debt as a percentage of GDP on the planet at 225%, Japan has not felt the wrath of the bond vigilantes. Not only did the Yen not fall out of bed, but it soared to a post-war high against the USD last week after the earthquake/tsunami. Investors drove the value of the yen higher, anticipating a huge rebuilding program in Japan. Japanese financial institutions would need to convert foreign assets into yen to pay for damage claims and construction expenses, a process that would strengthen the currency. In anticipation, investors piled into yen, helping drive up its value. Central banks across the globe intervened and weakened the currency, for the time being. When the world comes to its senses, the Yen will weaken on its own.

Debt & Demographics

Japan is a one trick pony that just broke two legs and is waiting to be put down. They have experienced a two decade long recession. Their stock market is still 70% below its 1990 peak. They have no natural resources. They allow virtually no immigration. And their population is in a death spiral. The one and only thing they have going for them is their phenomenal ability to manufacture high quality products and export them to the rest of the world. The earthquake and tsunami that struck Japan severely damaged their just in time manufacturing machine. A surging yen would destroy their export machine by making their products more expensive. Hundreds of high tech Toyota, Honda, and Sony factories are shut. Four hundred miles of ports and harbors have been wiped out. There are rolling blackouts, with one million households without electricity. Over 500,000 people are still homeless.

The short-term impact of this disaster will push Japan into recession. The rebuilding efforts over the coming years will create a positive GDP figure, but will not do anything to benefit Japan over the long haul. The billions designated to rebuild will be money not invested in a more beneficial manner. The linear thinkers conclude that over the long-term Japan will be OK. These people are ignoring the double D’s – Debt and Demographics. When Japan entered its two decades of recession and experienced the Kobe earthquake in 1995, its government debt stood at 52% of GDP. Today it stands at 225% of GDP. Twenty one years ago, the Japanese population was still relatively young, with only 12% of the population over 65 years old. The population of Japan peaked in 2004 and now is in relentless decline. Over 23% of the population is over 65 and the median age is 45 years old. For comparison, the median age in the U.S. is 37 years old, with only 13% over 65. The projection portion of the chart below paints a picture of death. The population of Japan is aging rapidly and will decline by 4.4 million, or 3.5% in the next ten years.

The question I pose to the mainstream thinkers is, “How can a country with a rapidly aging population and nearly one quarter of its population over 65 years old generate the necessary dynamic enthusiasm for rebuilding a shattered country?” Youthful enthusiasm and hope for a brighter future is essential to any enormous rebuilding effort. Japan does not have it in them. News reports already indicate a lethargic and seemingly insufficient response by emergency workers. The devastation seems to have overwhelmed this aging country. The psychological impact of this type of natural disaster will likely have two phases. Psychology professor Magda Osman describes the expected human response:

“After a disaster, typically small communities become incredibly co-operative and pull together to help each other and start the rebuilding process. There’s an immediate response where people start to take control of the situation, begin to deal with it and assess and respond to the devastation around them. The problem is that we aren’t very good at calculating the long-term effects of disasters. After about two months of re-building and cleaning up we tend to experience a second major slump when we realize the full severity of the situation in the longer term. This is what we need to be wary of because this triggers severe depression.”

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This would be the normal response of a traumatized populace. An aged populace is likely to experience worse depression and not bounce back from this tragedy. Japan is still the 10th most populated country on earth, with the 3rd largest economy. China just passed Japan to become the 2nd biggest economy in the world. India will pass Japan by 2012.

Youthful countries across the world are gaining on Japan. The wisdom of the elderly doesn’t cut it in a global economy. Global competition is cutthroat. China, India and the other emerging Asian countries will take advantage of Japan’s misfortune by filling the hole left by Japanese manufacturers. The short-term issues of power, supply lines, and reconstruction are minor when compared to a mass die off of the Japanese population that will result in a population that is 25% smaller in 2050 than it is today. Demographics are a bitch.

With the amount of debt hanging over the Japanese empire, it might be a good strategy to commit hari-kari. The non-thinking pundits on CNBC contend that since Japan hasn’t had any detrimental effects from running their debt to 225% of GDP, running it to 300% won’t be a problem. Reinhart and Rogoff studies concluded that once a country breaches the 90% level, growth slows and a debt crisis is likely to ensue. Japan has been stuck in a 20 year recession, as they chose Keynesian shovel ready projects, quantitative easing, currency manipulation, and covering up the true financial condition of its banks over accepting the consequences of a debt bubble. Remind you of anyone? The result is their real GDP is lower today than it was in 1995. The Paul Krugmans of the world would contend that they just didn’t spend enough.

The only reason Japan has not collapsed is due to its homogeneous population willing to buy virtually all of the debt issued by its government for the last twenty years and its prodigious ability to produce high quality products that the rest of the world wants. Japan has maintained a consistent trade surplus, and its government debt has been held mainly by its own people, with 95% of Japanese government bonds in the possession of Japanese, meaning the country was able to finance itself without depending upon fickle foreign investors who might prefer a return greater than 1%. This ain’t 1990. The savings rate of the Japanese population had already declined from 14% in 1990 to 2% by 2008. In a recent article, Mike Shedlock explained the situation prior to the recent devastation:

“The Government Pension Investment Fund, which oversees 117.6 trillion yen ($1.4 trillion), in September forecast that it would sell 4 trillion yen in assets in the business year ending March 31 to fund payouts. Sales by the fund, which helps oversee public pension funds for Japan’s 37 million retirees, come as the first of Japan’s baby boomers is set to turn 65 in 2012, making them eligible for pension payments. Japan choices are to default on its debt, print money to fund interest on the debt, raise taxes effectively robbing savers of their money, or undertake huge spending cuts. The dilemma stems from years of Keynesian and Monetarist stupidity.”

The new tragedy will just accelerate the conversion of Japanese savers into forced spenders. Millions of Japanese savers will be forced to spend their savings on survival, as many have lost their jobs and businesses due to the monumental damage to northern Japan.

Setting Sun – Race to the Bottom

Traders figured out what must happen over the coming years. A large swath of Japanese insurers and companies will begin repatriating assets held in other currencies to begin the rebuilding effort at home, driving the value of the Yen higher. At a time of crisis a stronger Yen would severely damage Japan’s export based economy even further. Therefore, Central Banks around the world jointly intervened. The Bank of Japan spent Y2 trillion ($25 billion), while central banks across Europe contributed $5 billion and the Federal Reserve spent $600 million to push down the yen on Friday. The Bank of Japan is doing what they do best – printing money. Quantitative easing is an art form perfected by all Central Banks across the globe. Every disaster over the last twenty years, whether man made (wars, internet collapse, housing collapse, debt meltdown) or caused by nature, are met with the exact same solution – PRINT MONEY.

This method works until it doesn’t work. Japan’s central bank cannot reverse the demographics. From this point forward the population of Japan will be net sellers of government debt. Japanese insurance companies will be on the hook for $33 billion in claims. They will need to sell government bonds in order to make those payments. The World Bank has estimated the cost of rebuilding to be $235 billion. The government will need to borrow this money. At least 30% of its energy needs are off-line. It already imports 95% of its oil and coal. They will need to increase energy imports to make up for the nuclear energy shortage. Its positive trade balance was already in decline. The clueless CNBC pundits can drone on about how this natural disaster will be good for the Japanese economy because of the substantial rebuilding program, but they are dead wrong. Japan is trapped, with no way out. They will need to issue hundreds of billions in new debt, which cannot be bought by its citizens, pension funds, or insurance companies. How many foreign investors will buy a 10 Year Japanese government bond paying 1%, knowing that Japan wants to weaken its currency? NONE. The only choices are to raise interest rates to attract buyers or print more money. With an already suffocating level of debt, they can’t allow interest rates to rise. They would choke on the interest.

The Bank of Japan will follow the same script as Ben Bernanke. They will print new Yen and buy the newly issued debt. What an original idea. Japan is caught in a debt stranglehold and demographic nightmare. Their currency will ultimately collapse like a nuclear reactor after a tsunami. When Japan defaults on their debt, the pain will be intense, as they will be throwing their own aged population under the bus. America, on the other hand, will throw the whole world under the bus when we default.

The Japanese own $886 billion of US Treasuries and have bought $256 billion of our debt since October 2008. Timmy Geithner will need to issue $1.5 trillion of new bonds per year. Japan will no longer be a buyer. They will be a seller. This will put upward pressure on U.S. interest rates. Japan’s reconstruction needs will put pressure on commodity and energy prices. Production and supply problems for Japanese parts and goods are already creating problems for GM and other car companies in the U.S. Lack of supply leads to higher prices. The great earthquake/tsunami/nuclear meltdown of 2011 will result in more quantitative easing in Japan and the U.S. This will result in even more inflation than we are experiencing today. Once the inflation genie is out of the bottle, the race to the bottom will accelerate. Gold will decide who wins the race. It has been a neck and neck race since 2001. I’m not sure it is a race anyone wants to win. But the destination is certain.

“The endeavors to expand the quantity of money in circulation either in order to increase the government’s capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation.” – Ludwig von Mises

TIDE OF 1,000 BODIES

I don’t care how stoic and well organized the Japanese are. No one can be prepared for what is hitting them day after day. It is mentally overwhelming. I’m no phsychologist, but I would expect mass depression to sweep over their population. Their demographics are dramatically skewed toward older people. The country doesn’t have enough young people to overcome this devastation with the enthusiasm they showed in 1995 after the Kyoto earthquake. Their Debt to GDP was 90% in 1995. Today it is 200%. They don’t have the financial wherewithal to recover from this disaster. Japan’s economy will spiral downward. I believe this will be the tipping point for the far worse part of the Fourth Turning.

Tide of 1,000 bodies overwhelms quake-hit Japan

By JAY ALABASTER and TODD PITMAN, AP
27 minutes ago

Debris covers part of a fishing port on Izushima island in Onagawacho, north…

Millions of people were facing a fourth night without water, food or heating in near-freezing temperatures in the devastated northeast. Meanwhile, a third reactor at a nuclear power plant lost its cooling capacity and the fuel rods at another were at least briefly fully exposed, raising fears of a meltdown. The stock market plunged over the likelihood of huge losses by Japanese industries including big names such as Toyota and Honda.

A Japanese police official said 1,000 washed up bodies were found scattered Monday across the coastline of Miyagi prefecture. The official declined to be named, citing department policy.

The discovery raised the official death toll to about 2,800, but the Miyagi police chief has said that more than 10,000 people are estimated to have died in his province alone, which has a population of 2.3 million.

In one town in a neighboring prefecture, the crematorium was unable to handle the crush of bodies being brought in for funerals.

“We have already begun cremations, but we can only handle 18 bodies a day. We are overwhelmed and are asking other cites to help us deal with bodies. We only have one crematorium in town,” Katsuhiko Abe, an official in Soma, told The Associated Press.

In Japan, most people opt to cremate their dead, a process that, like burial, requires permission first from local authorities. But the government took the rare step Monday of waiving that requirement to speed up funerals, said Health Ministry official Yukio Okuda.

“The current situation is so extraordinary, and it is very likely that crematoriums are running beyond capacity,” said Okuda. “This is an emergency measure. We want to help quake-hit people as much as we can.”

Friday’s double tragedy has caused unimaginable deprivation for people of this industrialized country — Asia’s richest — which hasn’t seen such hardship since World War II. In many areas there is no running water, no power and four- to five-hour waits for gasoline. People are suppressing hunger with instant noodles or rice balls while dealing with the loss of loved ones and homes.

“People are surviving on little food and water. Things are simply not coming,” said Hajime Sato, a government official in Iwate prefecture, one of the three hardest hit.

He said authorities were receiving just 10 percent of the food and other supplies they need. Body bags and coffins were running so short that the government may turn to foreign funeral homes for help, he said.

“We have requested funeral homes across the nation to send us many body bags and coffins. But we simply don’t have enough,” he told the AP. “We just did not expect such a thing to happen. It’s just overwhelming.”

The pulverized coast has been hit by hundreds of aftershocks since Friday, the latest one a 6.2 magnitude quake that was followed by a new tsunami scare Monday. As sirens wailed, soldiers abandoned their search operations and told residents of the devastated shoreline in Soma, the worst hit town in Fukushima prefecture, to run to higher ground.

They barked out orders: “Find high ground! Get out of here!” Several soldiers were seen leading an old woman up a muddy hillside. The warning turned out to be a false alarm.

Search parties arrived in Soma for the first time since Friday to dig out bodies. Ambulances stood by and body bags were laid out in an area cleared of debris, as firefighters used hand picks and chain saws to clear an indescribable jumble of broken timber, plastic sheets, roofs, sludge, twisted cars, tangled powerlines and household goods.

Helicopters buzzed overhead, surveying the destruction that spanned the horizon. Ships were flipped over near roads, a half-mile (a kilometer) inland. Officials said one-third of the city of 38,000 people was flooded and thousands were missing.

In addition to the more than 2,800 people who have been confirmed dead, more than 1,400 were missing. Another 1,900 were injured.

Japanese officials have refused to speculate on how high the death toll could rise, but experts who dealt with the 2004 Asian tsunami offered a dire outlook.

“It’s a miracle really, if it turns out to be less than 10,000 (dead),” said Hery Harjono, a senior geologist with the Indonesian Science Institute, who was closely involved with the aftermath of earlier disaster that killed 230,000 people — of which only 184,000 bodies were found.

He drew parallels between the two disasters — notably that many bodies in Japan may have been sucked out to sea or remain trapped beneath rubble as they did in Indonesia’s hardest-hit Aceh province. But he also stressed that Japan’s infrastructure, high-level of preparedness and city planning to keep houses away from the shore could mitigate their human losses.

The Japanese government has sent 100,000 troops to lead the aid effort. It has sent 120,000 blankets, 120,000 bottles of water and 29,000 gallons (110,000 liters) of gasoline plus food to the affected areas. However, electricity will take days to restore.

According to public broadcaster NHK, some 430,000 people are living in emergency shelters or with relatives. Another 24,000 people are stranded, it said.

One reason for the loss of power is the damage several nuclear reactors in the area. At one plant, Fukushima Dai-ichi, three reactors have lost the ability to cool down, the latest on Monday. Explosions have destroyed the containment buildings of the other two reactors. Fuel rods at the third were fully explosed, at least briefly, on Monday.

Operators were dumping sea water into all three reactors in a last-ditch attempt to cool their superheated containers that faced possible meltdown. If that happens, they could release radioactive material in the air.

But Japan’s Chief Cabinet Secretary Yukio Edano said the inner containment vessel holding the nuclear fuel rods at the reactor that experienced an explosion Monday was intact, allaying some fears of the risk to the environment. The containment vessel of the first reactor is also safe, according to officials.

Still, people within a 12-mile (20-kilometer) radius were ordered to stay inside homes following the blast. AP journalists felt Monday’s explosion 25 miles (40 kilometers) away.

Military personnel on helicopters returning to ships with the U.S. 7th Fleet registered low-level of radioactive contamination Monday, but were cleared after a scrub-down. As a precaution, the ship shifted to a different area off the coast.

More than 180,000 people have evacuated the area around the plants in recent days.

Also, Tokyo Electric Power held off on imposing rolling blackouts planned for Monday, but called for people to try to limit electricity use.

Edano said the utility was still prepared to go ahead with power rationing if necessary. The decision reflected an understanding of the profound inconveniences many would experience.

Many regional train lines were suspended or operating on a limited schedule to help reduce the power load.

Japan’s central bank injected 15 trillion yen (US$184 billion) into money markets Monday to stem worries about the world’s third-largest economy.

Stocks fell Monday on the first business day after the disasters. The benchmark Nikkei 225 stock average shed nearly 634 points, or 6.2 percent, to 9,620.49, extending losses from Friday. Escalating concerns over the fallout of the disaster triggered a plunge that hit all sectors. The broader Topix index lost 7.5 percent.

Japan’s economy has been ailing for 20 years, barely managing to eke out weak growth between slowdowns. It is saddled by a massive public debt that, at 200 percent of gross domestic product, is the biggest among industrialized nations.

Preliminary estimates put repair costs from the earthquake and tsunami in the tens of billions of dollars — a huge blow for an already fragile economy that lost its place as the world’s No. 2 to China last year.