Monday, December 26, 2011

U.S to Fund $541 Billion of Debt in 1st Qtr, Japan to Fund $1.9 Trillion of Debt in 2012. Trouble Brewing?

It seems as if the U.S. and Japan have learned nothing from the European debt crisis. The world's two largest issuers of sovereign debt will continue to run up huge deficits in 2012. The U.S. will fund its deficit and roll over maturing debt by raising $541 billion via Treasury auctions during the first quarter of 2012. Japan’s government plans to raise $1.9 trillion via bond sales in the fiscal year starting April 1.

Both countries face the risk of a financial melt down if the interest rates required to fund their debts climb substantially. However, Japan seems headed for trouble much sooner than the U.S. Wolf Richter has calculated that 52% of Japanese tax revenues will be eaten up by interest payment on the debt despite the near zero interest rate policy of the Bank of Japan. In the U.S., interest payments on the debt will eat up about 10% of tax revenues in 2012, so the U.S. is not in nearly as dire shape. After reading Richter's post The Endgame: Japan Makes Another Move the only logical conclusion appears to be that the Japan is headed for a financial crisis within the next few years. Here is an except from the post.      

But two of the strengths of the Japanese economy that have supported the absurd
deficit levels—a high savings rate and a large trade surplus—have collapsed.
The savings rate is in the low single digits, and the trade surplus has turned into
a ¥2.2 trillion ($29 billion trade deficit in 2011 through November.

It seems a bit absurd that there are buyers for the the 10 year notes of the U.S. and Japan with interest rates at 2% and 1%, respectively, despite neither country showing any willingness to take austerity measures or hike taxes. Unless a change in course occurs, terrible trouble in may be brewing in both countries.

Greece has already proven that at some point the maximum maturity on debt instruments that investors will buy is limited to just 6 months. Time will tell if the governments in the U.S. and Japan have learned anything from the European debt crisis. Sadly, there is no discernible evidence that they have learned a thing.

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