Apparitions in the Fog
Quinn’s predictions for 2013:
The new leaders in Japan and China won’t back down in their conflict over islands in the East China Sea. China will shoot down a Japanese aircraft and trade between the countries will halt, leading to downturns in both economies.
Worker protests over labor conditions in Chinese factories will increase as food prices spike. The regime will respond with brutal measures, but the protests will grow increasingly violent. Economic data showing growth will be discredited by what is happening on the ground.
Violence and turmoil in Greece will spread to Spain, and later Italy and France. The EU public relations campaign, built on debt and the false promises, will falter by mid-year. Interest rates will spike and the endgame will commence. Greece will depart the EU; Spain too. The debt crisis will plunge Europe into depression.
Hyperinflation caused by economic sanctions will provoke Iran to lash out at its neighbors, cyber-attacking Saudi oil facilities and U.S. corporations. Israel will consequently attack Iranian nuclear facilities. The U.S. will support them, and Iran will launch missiles at Saudi Arabia and Israel in retaliation. The price of oil will spike, further deepening the worldwide recession.
Syrian President Assad will be ousted and executed by rebels. Syria will fall to Islamic rebels unfriendly to the U.S. and Israel. Russia will stir up discontent in retaliation for the ouster of their ally. Egypt and Libya will increasingly become Islamic states and will further descend into civil war.
The further depletion of its oil fields will destroy Mexico’s economy as it becomes a net energy importer. Drug violence will increase; more illegal immigrants will pour into the U.S., which will station military troops along the border.
Cyber-attacks by China and Iran on government and corporate computer networks will grow increasingly frequent. One or more of these attacks will threaten nuclear power plants, our electrical grid, or the Pentagon.
Japan’s New Fiscal Policy Explained and Why It Matters
The Japanese government and its central bank are taking measures to stimulate the economy, including an open-ended commitment to buy assets and push inflation up to 2%, while increasing fiscal spending.
In the early 2000s, Japan expanded the money supply to raise inflation expectations. By late 2005, the economy was recovering. But when the banking crisis and the European crisis hit, all gains were lost. Japan faced a double whammy: It lost markets in the US and Europe, and the yen appreciated. There was a decline in real GDP growth that exacerbated the chronic price deflation that Japan constantly struggles with.
While quantitative easing is a standard prescription for Japan’s situation, what complicates matters is Japan’s high level of public debt, which currently stands at nearly 300% of GDP. Monetary and fiscal easing of the sort proposed by President Abe will add to it.
However, Japan may be able to get away with it because its debt is almost wholly owned domestically. This means that interest payments on sovereign debt are mostly paid back into the Japanese economy, and Japan can, in effect, use tax revenue to pay interest on it.
Japan is trying to escape from a cycle of low GDP and deflation to a new equilibrium. But monetary easing has its critics within Japan who think it could lead to a rise in long-term bond yields, which would put further pressure on the government’s highly leveraged position.
Japan also faces other problems. Its post-Fukushima move away from nuclear power has made it increasingly dependent on foreign sources of energy. It also faces a demographic trap, with low fertility and an increasingly dependent aging population. These structural issues will have to be dealt with in the long term.
In the long run, the best-case scenario would be President Abe’s gamble paying off while the worst case would be a meltdown à la Greece, which would likely bring most of the world down with it.
The Critical Chart in Sovereign Debt Analysis
“Most people look at debt-to-GDP ratios when thinking about sovereign debt. It’s a good measure, but there’s a better one that goes for the jugular; the ratio of public debt to government revenue. By changing the denominator in this way you get a direct feel for how increases in interest rates affect government accounts. For example, when public debt is 10X government revenue then a 1% increase in the average interest rate paid on public debt forces the government to use an additional 10% of its revenues for paying interest. In short, this metric gives you a clear idea of just how easily a government could reach the Keynesian endpoint (i.e. the point at which all of government revenues are used to pay interest alone).
So, to give you a macro view of sovereign leverage around the world here we present a chart with public debt to government revenue ratios in 95 countries. Countries with a GDP over $40bn are included in the chart and major countries ($800bn+ GDP) are highlighted…”