The Coming Global Debt Default Binge: Japan’s Pension Fund Sells Japanese Government Bonds (JGB)

The era of Japan’s low interest rates may be at an inflection point.

From San Francisco Chronicle/Bloomberg,

Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases.

“Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash,” said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). “To boost returns, we may have to consider investing in new assets beyond conventional ones,” he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March, according to the fund’s financial statement for the 2011 fiscal year. That compares with 13 percent in domestic stocks, 8.7 percent in foreign bonds and 11 percent in overseas equities.

Again the above represents the unintended consequences of the unsustainable welfare state. These could be incipient signs of the liquidation of Japan’s Santa Claus political institutions.

The lack of internal financing (from resident savings) means that Japan’s enormous debts will need to be financed by external (foreign) savings. This also means that Japan will be in tight competition with the Eurozone and the US to attract financing from the world. The nuclear option is that the Bank of Japan (BoJ) will become the financier of last resort.

Neo-Keynesians and Fisherians who claim that the world will undergo prolonged episodes of low interest rates based on historical experiences and from the prospects of deflation, fail to see that this has NOT just been about banking financial crisis, but about the crises of governments manifested through unsustainable debts.

Most of their analysis has been moored to historical banking-financial crisis, e.g Great Depression and Japan’s lost decade, rather than government debt crises.

It is dangerous to read the recent past as roadmap of the future. The above chart from the Economist shows that interest rates of major economies (US Germany Spain and Italy) had their volatile chapters.

When there will be inadequate or scant access to private sector savings, then the chances for a full blown debt crisis becomes a clear and present danger.

Once interest rates rises—out of the lack of financing and or from BoJ’s inflation financing—higher rates would mean higher interest rate payments which is likely to swell the existing debts.

Yet given the Japan's insufficient economic growth from growing political interventionism, surging interest rates will negatively impact both Japan’s banking and financial system as the largest holders of JGBs and Japan’s government—a self-reinforcing spiral.

So the debt crisis, which has already been ravaging the Eurozone, may likely be transmitted to Japan. Unfolding events have been so fluid which means conditions may deteriorate swiftly beyond the public's expectations.

Be careful out there.

Greece Exit: Fall Back to Better Leap Forward

Historian Eric Margolis argues that Greece must exit the EU to save the euro

At the LewRockwell.com, Mr. Margolis writes,

What would happen to Greece if it quit the euro? Financial chaos, capital flight, riots, and bank failures. But after the apocalypse, Greece would eventually revert to its 1960’s status: a poor but proud nation living off tourism, shipping, agriculture and fishing.

Devaluing a new drachma won’t do much for a nation whose main export is olives and feta cheese. Besides, the Greeks have severely damaged their tourist industry by endless strikes and surly service.

Angela Merkel is rightly concerned that Greece’s exit from the euro would be a blow to Europe’s political unity. This aspect of the crisis is as important as the economic/financial dimension.

But Merkel should also recall the timeless dictum of Prussia’s king and renowned general, Frederick the Great: "he who defends everything, defends nothing."

Greece should never have been admitted to the euro. It snuck into the currency union by hiring those miscreants at Goldman Sachs to falsify its financial books.

Admitting Greece to the euro zone was a bridge too far. Euro membership should be limited to those nations that have solid finances and honest reporting. In short, a club of northern European nations that follow Germanic good government. Unprepared nations, like Greece, Romania, Bulgaria, Serbia, Moldova or Ukraine do not belong in the euro zone. Most have no business in the EU either.

The European Union and euro zone expanded too far, too fast. Retrenchment is now in order. As the French say, "fall back to better leap forward."

Amidst this crisis, what many forget is that it was caused by politicians borrowing too much to buy votes and shady bankers lending recklessly to boost their own bonuses.

If there is one thing we learn from the Euromess it is the Golden Rule: governments must raise any and all funds they spend.

Borrowing from the money lenders is poison. More empires and nations have been ruined by unsustainable borrowing than by wars. Politicians should not be allowed to borrow except for well-defined, long-term projects, likes roads or bridges, in which revenue streams and repayment schedules are clearly defined.

Well, government spending which has led to massive borrowing has been the main culprit that has brought upon this crisis. And to reduce government spending means to allow forces of productivity to flourish. And productivity comes from the free markets. It’s the only way.