Toshio Masuda

Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder

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(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)

"Straight from the shoulder " by Toshio Masuda March 7, 2016
( Free of charge to the people I met)
Japan is the World’s Riskiest Potential Failed State!
So what?

The advanced countries continue to rack up deficits every year, which grow and never shrink.
The balance between revenues and spending is always negative (in the red) and there is no forecast for getting in the black. This means that advanced countries are potential failed states.
Only those countries that have the ability to print their own money can pay their treasury bonds when they come due without defaulting on them. Countries which can’t issue their own currencies, but are pegged to the dollar or euro, can’t issue bonds to cover government debt, and therefore have a very high risk of defaulting.
This is why there’s no end to news trumpeting a possible sovereign debt default in Greece and other Eurozone countries.
The only advanced country with zero risk of defaulting on its government securities is Japan.
Japan’s accumulated debt is 12 trillion yen, which is approximately 240% of GDP? The worst number among advanced countries.
But almost all Japanese government bonds are held by the people of Japan (including other government institutions, banks, corporations, individuals), so there’s no risk of them being sold off by other countries.
The Bank of Japan, as Japan’s central bank, continues unhesitatingly to buy deficit-covering bonds issued by the government, so the yen is seen as the most stable currency in the world.
This is why the yen goes up whenever there’s credit uncertainty in the EU.

The US has the second most stable government bonds in the world after Japan.
China and Japan primarily hold about 50% of US treasuries, so there does exist the risk of those treasuries being sold off.
But the dollar is the trading currency of choice for buying and selling crude oil, natural gas, and other resources in the Middle East and other oil - producing countries, which constantly creates dollar demand for daily resource prices.
Moreover, around 60% of global trade is done in dollars, and this also constantly creates dollar demand for dollar procurement in trade between third-party countries.
Needless to say, the US government has the freedom to issue as much deficit-covering government debt as it wants, and while there is the risk of those bonds being sold off by other countries, in reality the risk of the US defaulting on that debt is essentially zero.
So, Japan has zero risk of default and the idea of the US defaulting is inconceivable.
Which means that any talk of the US or Japan defaulting is nonsense!
The US and Japan are both welfare states, so as revenues fall, expenditures continue to grow astronomically, but they continue to pay off that debt whenever it comes due by issuing new bonds, so they never default.
Now, there are people who say that if the government keeps issuing new debt, that’ll cause the currency value to drop, which will lead to hyper-inflation, but because there’s absolutely no risk of default, ordinary people keep putting their assets into these absolutely risk - free government bonds, which buoys debt and the currency and lowers interest rates. Market rates are zero or negative and prices seem a little deflationary? you couldn’t cause inflation if you wanted to. The word “hyper-inflation” ought to be removed from all dictionaries in Japan and the US.

If the market falls when people get sick of taking advantage of all the zero - interest or negative-interest money falling from the sky, financial asset prices will all hit rock bottom, and then the recovery will start. It’s a cycle: scrap everything and build anew.
Like the tide that flows in and out.
Borrow money you have no intention of repaying, and when you can no longer repay it, you write another IOU, which is worthless, and enjoy life. That’s how you do things right in a capitalist (credit) society.
If there are any problems, they’re in the area of morals.
Morals and capitalism don’t mix.
That doesn’t mean anyone wants communism, of course.
Japanese people are full of morals and oppose capitalism on ideological grounds, but the yen?that pillar of the Japanese economy?is the safest, most trusted currency in the world.
The US and the EU, which have taking in their DNA, should buy Japan, which has giving in its DNA, as a kind of penance.
Can there be a safer, more conscience-cleansing investment than that?

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Written by Toshio Masuda