Japan’s Ponzi Finance: Public Debt Tops Quadrillion Yen Mark!

To paraphrase a quote misattributed to the late US senator Everett Dirksen: A trillion here, a trillion there pretty soon we are talking about quadrillions! 

For Japan’s debt, quadrillion is now a reality

From Wall Street Journal Economics Blog: (bold mine)

Japan’s central-government debt topped the quadrillion-yen mark for the first time ever in the second quarter, passing the unwelcome milestone just as a national debate heats up on whether the government should follow through with a controversial a plan to raise the sales tax.

The central government’s outstanding liabilities totaled ¥1.009 quadrillion ($10.44 trillion) at the end of June, up from Y991.601 trillion three months earlier. A Finance Ministry official said it’s the first time total debt has risen above ¥1 quadrillion since the yen became Japan’s official currency in 1871.

The figure is more than 200% of what Japan’s economy, the world’s third-largest, produces per year. That’s by far the highest debt load among industrialized economies.

Add some ¥200 trillion of outstanding long-term municipal debt and the ratio jumps to 250%.

The quadrillion-yen level may be memorable but it isn’t a game changer. It was expected because Japan’s government continues to borrow heavily, financing nearly half of its spending with borrowed money as it pushes off tough reforms.

Any entity that engages in borrowing money to finance previously borrowed money is known as a Ponzi borrower.

According to the data from the Japanese government’s Ministry of Finance, 51% of the government’s revenues will come from tax, stamp and other revenues. The other 49% of the financing of the government’s expenditures will come from government bond issuance (red ellipse). 

So previous debts will be financed by issuance of new debt...thus today's accrued quadrillion yen milestone of debts.

Ponzi finance, according to Hyman P. Minsky in The Financial Instability Hypothesis, is when (bold mine)

the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts

Of course all the seeming placid conditions will entirely depend on interest rates remaining at current levels and of the sustained confidence by creditors on Japan’s ability and willingness to pay. 

The above pie chart of JGB holdings, also from the MOF, is from the pre-Abenomics period. 

It shows that banks, life and non –life insurance, private and public pension as major creditors of Japan’s government. 

Recent developments reveal that banks, several insurance companies and foreigners have significantly pared their JGB holdings.

Meanwhile the ratio of JGBs held by retail investors has peaked in March of 2009 at 4.6% to about 2.5% in March 2013.

This leaves the Bank of Japan (BoJ) as the buyer and financier of last resort for the Japanese government. As the BoJ grabs a larger share of the JGB pie, the issue of confidence from the marketplace will decline, but...

Again Mr. Minsky on the inflationary dynamic of Ponzi financing:

if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.

In other words, the BoJ would need to keep piling up on such “inflationary state” in order to maintain the current balance, otherwise, the entire house of card collapses. 

The BoJ is trapped with the consequences of her previous actions: stop monetary inflation and the ponzi scheme unravels-- or-- proceed with more monetary inflation, interest rates soar as the currency dives, the same ponzi dynamic collapses. 

Funny how government outlaws Ponzi schemers like Bernard Madoff, when they operate on virtually the same 'something for nothing' 'screw the public' dynamics as social policies.