In an effort to halt expansion of Japan’s massive public debt, Japan’s Prime Minister Seeks Doubling National Sales Tax.

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

‘Worse and Worse’

Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”

No Winning Play for Japan

If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be  insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.

On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.

Massive Debt Rollover Problem

For a discussion of the global debt rollover problem, please see World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
 
Mike  “Mish”  Shedlock – Global Economic Analysis

As is my usual practice it’s that time of year when I score my “best guesses” from the previous year, and look forward with my next set.  If you’re not inclined to bother with long-winded explanations the title is probably sufficient.  But for everyone else, let’s look at the 2011 list and see how I did.

• We’re not going to get away with spending another $450 billion in deficits on top of the $1.6 trillion we blew last year.  $2 trillion in deficits?  Not a prayer.

Well that “more or less” worked out.  I don’t have the final numbers yet and won’t for a bit as I’m writing this before the end of the year, but we most-certainly did not run a $2 trillion deficit.  As of 12/21 it’s right near $1.1 trillion gross ($1.3ish involving cash adjustments.)  This is a bad number though as the most-recent data isn’t in and neither are the cash adjustments that Treasury usually makes. Nonetheless there’s no way we’re going to see another trillion “magically appear”, so that’s a point.

• Europe will not get their debt situation under control.  I give us a 50/50 chance that Ireland repudiates it’s “deal” immediately following their elections, and the cancer there will spread.  I won’t call a breakup of the Euro – yet – but the possibility exists that one or more nations will leave the common currency next year.  I only see the odds as something around 50% though, so it doesn’t go on the “prediction” board for this year.

Nothing but net on this one.

• The Dollar remains the hooker with crabs while many other currencies have AIDS.  The wildcard is the Pound.  Britain may actually have their act under reasonable control.  We’ll see.  For the Euro, no such luck.  I expect a wide trading range with lots of both euphoria and tears, perhaps as much as 40% or more.  That means we’ll get plenty of whipsaws in the /DX as well.  Nonetheless, the doomers call of a dollar collapse and gold at $3,000+/oz will be wrong.

Nothing but net again.

• Oil is going to $100, and maybe considerably higher – but not on demand, rather on a “safe haven” and speculative play.  Go look at 07/08 for how this plays out.  And get ready for the bad effect on your wallet from higher gas prices.  I expect the $4 line to be breached in high-cost areas by the summer, and we may see $5 gas this year.  But – by the end of the year oil will be on the decline.  Again.  And again, it will be because the economy is in fact going down the crapper.

Again, score.

• Commodities will continue to ramp right up until oil tops as the economic reality that “charge it” can’t fix what’s broken sinks in.  Recognition will come hard and fast, and metals will not be exempt.  When oil starts to roll over beware.  Everyone loves commodities.  When everyone’s on the same side of the boat it usually tips over and there are sharks in the water below.

How’s that gold trade working out for ‘yall?  Topped nicely and sliding now.  Point.

• Fannie and Freddie will get some sort of “resolution” path – and it won’t be positive for them.

Miss.

• “Someone” will pry open the REMICs in MBS-land for at least private-label deals and fun will ensue.

Miss, but I think only on time.  The lawsuits are coming — California and Nevada are leading this charge but I said 2011 and it didn’t happen.  No score when the timing is wrong.

• China will roll over as their attempts to tighten policy have come too small and too late.

Score.  Shanghai market is down about 25% on the year.  They’re not done either.

• Housing is and will “double-dip.”  There’s no bottom.  Those who bought the gamed reflex bounce on the tax credits and faux “stabilization” are in big trouble.  My projection is for a mid-single-digit to 1x% decline in prices nationally in 2011, and even then it won’t be over.

Half-point; we got a massive restatement on sales but the 1x decline in prices didn’t happen.  No bottom though — that’s agreed by pretty-much everyone.

• States will try to tax their way out of pension trouble, and fail.  The Whitney call will be wrong but only because of how she phrased it.  States and municipal governments will be increasingly recognized as insolvent but they will continue to play games to try to stretch cash flow rather than defaulting outright.

Score.  No defaults en-masse but the games and the problem were spot-on.

• Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.

Nope.  Early — this one gets repeated for 2012 though.

• Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2011 and the addict will go through withdrawal.

Eh, no point.  But the earnings flow-through on the PPI is here but I can’t take the point yet.  This one gets repeated for this coming year and I might have only been off by three months.  Nonetheless, early is wrong.

• Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.

It got talked about but didn’t hit earnings until the start of 4Q.  Miss on time, will repeat this one too.

• The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.

Ditto.  No point.

• The Fed will get neutered, but it won’t be due to Ron Paul.  He’ll huff and he’ll puff and then blow a fart instead of blowing down their house.  It won’t matter.  Bernanke’s credibility will be severely trashed by the end of the second quarter as his monetization will be increasingly seen by The Republicans as nothing more than a way to pander to the profligacy of Congress (which they’ll try to pin in the Democrats, despite their fully-complicit role in it.)  The end result (albeit through the typical partisan BS) will be that QE2 is the last time that happens, period.  I expect an all-on attempt to change The Fed mandate to remove “employment” and possibly define “stable prices.”  These two things, incidentally, would be tremendously positive, and the first might actually succeed.  The second?  Don’t hold your breath.  Dennis Kucinich’s bill would be even better, and it will be reintroduced – and fail to gain any material sponsorship including from the Pauls.  Somewhere around the middle of the year this entire dynamic starts to become interesting in the 2012 Presidential sense.

I’ll take that point.  NO QE3, despite everyone who called for it.

• The TNX will hit 4%, likely in the first quarter. 

Clean miss.

• We won’t get bond auction “fails” per-se (that’s impossible given the Primary Dealer setup) but there will be plenty of “D”s and “F”s in terms of grades, with lots of tail showing.  Again, I expect this mostly in the first half of the year

Clean miss.

• The market will roll over this year.  And not in a small way either.  We may finish the year over 1,000 on the SPX, but we’re going Helium-style diving at some point first.  Since timing is everything in this game I’ll stick my neck out – there will be a sucker sell-down early this year, the market will bounce, and then Hell will rain on earth later in the year and into 2012.

We got a lot of it but not enough.  Half credit – big sell-offs but the ending point is definitely wrong.

• Expect extreme volatility.

Uh, yeah.  Point.

• The potential for a regional war to break out is extremely high.

Nope.

• Civil unrest will spread beyond a few demonstrators in Europe.  This includes the possibility of unrest in the United States.

Miss.  “Occupy” doesn’t count and while there has been some over in Europe in particular what we’ve seen is not what I had in mind.  No point.

Looks like 10 out of 21.  Remember that to be right you have to hit both the event and the time, so I consider this a pretty good score.  You can judge it however you want.

Now let’s look at how things are today.

As this goes to press The ECB has tried to “put out” the Euro debt zone fire for about the 10th time this year.  None of the others have worked and this one won’t either.  There’s simply no “there” there.  The EU banks are ridiculously over-levered, there is no real attempt to force them to cut that crap out and in fact at this point they probably can’t since they’ve geared up on sovereign debt — if they sell it down rates will spike to the moon and the entire EU comes apart.  If they don’t and something goes wrong (anything!) then they blow up, rates spike to the moon and the EU comes apart.

If you’re wondering why there’s been no solution that’s the reason — there isn’t one that doesn’t involve taking these wealth-destroying institutions out back, shooting them, paying off depositors as best you can and then either charging their executives under the law or simply turning them over to the now-very-pissed-off citizens who just saw their pensions and social benefits go “poof” (never mind that it’s really the politicians fault that it all happened in the first place!)

Speaking of that I want to go into a bit of detail, because it seems that people just don’t “get it” in this regard.  It’s convenient to blame the big banksters, and they’re certainly a big part of it.  But the primary blame has to rest with the political class for two reasons: They make the laws under which the banks operate and they love making political promises to spend money they both don’t have and are unwilling to tax someone to acquire.

What Congress spends but doesn’t have Treasury must borrow.  When Treasury borrows it creates the capability for banks (including The Fed) to create monetary inflation and bubbles.

There are three sorts of “money” — actual surplus capital from past economic activity, self-liquidating credit and non-liquidating credit.  All three spend exactly the same but they are not the same.

The first is earned by someone’s efforts and it is what’s left after you pay your costs (including taxes, if any.)  That’s actual wealth — and is the only sort of “money” that one can call “real.”  At least in theory it is supposed to be durable and able to be saved, invested, or spent as you choose.

The second is credit money that is created to liquify an asset.  An example of this is a letter of credit guaranteeing payment for a shipment from Japan to the United States.  It’s hard to sue someone in the US from Japan, so this is very useful to commerce.  But this credit money goes away when the bill is either paid or defaulted.  The same model exists with a credit card that you pay off every month.  This has no inflationary impact because it disappears when the transaction is closed.

The third is credit money that is created based on nothing other than a promise to produce something tomorrow.  In the case of government that “something” is of only one form — taxes.  In the case of an unsecured private loan it could be anything from a revolving credit card to an OTC derivative trade.  The problem with such a loan is that it does not self-liquidate as it’s never closed — instead, it’s rolled over again and again.  Since this sort of loan permanently expands the number of monetary units in circulation it is a pure act of monetary inflation.  It is important to note that all government deficit spending has been of this form in the modern era — we have never actually run a budget surplus save one year — a tiny one in calendar 2000 (but not fiscal 2000.)

Why is this understanding so important, you might ask?  That’s simple — it is the explicit and intentional acts of the government in their overspending that lends cover to virtually all of the other ills with capital misallocation, trade imbalance and other games.

Let’s take a simple example: Nation “A” and “B” both have floating fiat currencies.  Nation “A” runs a trade deficit with Nation “B”.  What happens?  Capital drains from Nation “A” to “B” since the funds to buy the goods move and never come home.  This makes Nation “B” more wealthy and “A” poorer; that in turn makes the goods “B” is exporting more expensive in “A”s terms and almost-immediately cuts off the imbalance.

So how do you prevent that?  Oh that’s easy — get the government to run a $600 billion budget deficit!  Now you can “replace” $600 billion of capital with $600 billion of non-liquidating (that is, permanent) credit money.  Heh maw, look — my trade deficit didn’t self-extinguish!

But notice what’s going on under the surface: Capital and credit aren’t the same thing.  One is wealth, the other is a promise to labor tomorrow.  In other words one is the product of free men and women, the other is a demand that others submit to slavery — a promise that others will pay taxes in the future!

If you’re wondering where our jobs went, that’s how it happened.  The actual capital flowed out of the country and was replaced by credit which spends the same but isn’t the same at all.  What disappeared was wealth and freedom, and what replaced it was bondage, unemployment and McJobs.  If you’re wondering why despite Congress saying they don’t want to see all of our jobs go to China and Mexico it keeps happening, it is happening precisely because Congress will not stop spending more than they tax!

In other words it is Congress that has drained the capital of our nation through their policies.  They have serially lied to us for thirty years in this regard with those lies really picking up steam in the last decade.  The so-called “Tea Party” along with the Democrats and “mainstream” Republicans are all liars in this regard — every one of them is complicit, as any of these groups could have shut this down at any time. 

Had the Congress refused to raise the debt ceiling in August it would have immediately forced a balanced budget — without the need for a Constitutional Amendment.

Remember too that the House and Senate both have permitted “Continuing Resolutions” to run the government now for two years.  This was agreed to by both Houses, ergo, it’s both of their fault and those claiming otherwise are liars.

This same dynamic has played out over in Europe.  Greece, Spain, Portugal, Italy and others have all made promises they can’t keep with their current tax revenues. The same dynamic has led to the same outcome — they’re just a bit ahead of us on the road to perdition.

Of course the political impetus to spend money you don’t have is strong.  It’s easy to buy votes for a while by promising people things you know you can’t afford, and it is wildly unpopular for a politician to say “No.”  Even the vaunted Ron Paul who claims to be “Dr. No” in his voting record in fact does not honor that when it comes to earmarks — he lambastes them on the floor but when it comes to vote he pushes for, votes for and accepts them for his own district!

The reason of course is simple — he wants to keep his seat.

But overspending is a corrosive act no matter who is doing it.  It eventually bankrupts any entity that engages in this practice, but when governments get involved the results are particularly nasty, as it is the entirety of the nation that suffers.  The more attempts are made to cover up the effects of the stupidity, such as by financial repression of interest rates, the worse the harm and the more-widely that harm is spread across the population.

There’s been no honest attempt to deal with any of these issues, including most-particularly in the United States.  You cannot solve a debt problem with more borrowing any more than you can drink yourself sober.  We continue to believe we can run trillion-dollar+ deficits without consequence and the 10 year Treasury yield seems to agree.  What must be kept in mind is that this is the same dynamic that played out in Europe — including in both Greece and Italy — right up until it didn’t, and when the bond market came apart there it did so with extreme violence.  The same thing can and will happen here.

This, of course, leads to the obvious next question: when?   It is here that math provides a useful degree of guidance.

In 2007 we had to shrink our Federal Government by about 20-25% in order to restore balance to the economy.  Those who have followed The Ticker for what is now approaching five years and 5,000 articles know that I’ve been calling for this realignment incessantly since that time.  Instead we grossly expanded the size of our vote-buying programs with more and more deficit spending.  This led us to today where the required shrinkage is now approaching 50% in size — four years later.

This is an important fact, because that is a geometric progression.  Now let’s go back and see what we have four years previous and see if the progression holds up — to 2003.

In 2003 we ran about a $600 billion deficit against a GDP of $11.5 trillion, which was about 6%.  That is, we tracked under the geometric expectations on a backtest (which were about 10-11%.)

Can we survive a 50% reduction in the size of the Federal Government, a doubling in actual taxes received by the government, or some combination of the two?  I don’t know, but it doesn’t matter whether we can — one of the two or some combination adding to that point is going to happen whether we survive it or not!

The “outside window” on “when” is four years hence.  Of course that’s the “100% reduction” line at which point we simply collapse into civil war and anarchy forced by mathematics, and in truth we’ll blow sky high long before we get there.  You can reasonably expect that there will be attempts to push the line backward, but there is no actually stopping of the process until and unless we run a surplus in terms of economic growth — that is, growth in the economy must exceed growth in government spending (this, incidentally, means that if economic growth is negative the government must shrink at least as much.)

The members of the Simpson-Bowles deficit commission had their own private estimates of “how soon.”  None believe we have more than two years left.  I think that’s about right, and we may not get that far.  History says that these walls always are closer than they appear, just like the T-Rex was in the rear-view mirror in Jurassic Park.  Revulsion tends to come from a “moment of recognition” that precedes the actual hitting of the wall, just as it did in Greece and the rest of the European continent. Thus it will be here if we fail to address the issues facing our nation and defer to political expedience and vote-buying.

Now let’s look at the current macro picture.  We have durables reports showing massive inventory levels — in fact, the December report had inventory at all-time highs.  This, standing alone, is bad — it “pulls forward” GDP numbers but the sustainability of that is predicated on sell-through.  If there is no sell-through you’re in big trouble.

Add to that the earnings misses coming from various companies.  We are now into the maw of the profit impact from the PPI ramps of a year to 18 months back, which I’ve been pounding the table on now since August of 2010.  The PPI has slacked off on the rate of advance, but the damage is done.  That’s in the pipe and can’t be avoided.  In addition the organic profit cycle has almost-certainly peaked in terms of percentages of profit from gross sales.  Those two factors plus the inventory situation are all the ingredients for a severe inventory (conventional) recession while The Fed has already backed itself into a corner with ZIRP and The Federal Government continued to overspend!  In other words the policy tools to “help” are slim and none and Slim is in the bar getting drunk.

Politically we have a huge problem — the premise is “tax cuts good, anything that raises taxes bad.”  At the same time “spend more” remains the mantra of both political parties.  The “Pay For” on the recent FICA deal was spread over 10 years but the impact on the deficit — some $200 billion — is all right now.  Of course in a year nobody will be willing to “raise taxes” either, so the $200 billion over 10 years will be $2 trillion.  To those on the right who argue that “we can’t give more to the government; they’ll squander it” you’re free to run that line when the budget is balanced — until it is you’re just arguing for jamming the accelerator as we approach the brick wall at 100mph, exactly as are those on the left.  “Blow up in one year or blow up in two” still is “blow up.”  Both are stupid and indefensible and we should call them what they are — calls for anarchy — because that’s exactly what we’re going to get on this path.

Now let’s look east — specifically at Japan.  The most-recent budget, accepted by their government, calls for an astounding near-50% deficit — that is, they intend to borrow half of what they spend!  The willingness of the bond market to swallow whatever the Japanese government emits has led them to believe they can continue that sort of game forever.  They’re wrong.  And while I’m at it may I remind everyone that the Japanese stock market remains down more than 75% from its all-time highs — 20 years ago?  How’s that “earnings growth” and “economic progress” thing working out over there?

Finally, China.  The most-recent news is that of large minimum-wage hikes.  Nice idea.  Can they successfully navigate from a mercantile jackbooted exporter that steals anything that isn’t nailed down (and some things that are) to a consumer-led, consumption-based economy that generates actual economic surplus?  I’m not sold, especially when you add to that the need to stop treating the land, air and water like open sewers.

Returning back home we have one final area of contention to consider — it’s an election year.  If you think either major political party is going to do anything that might be perceived as “helping the other guy”, you’re nuts.  They most-certainly will not.  This will lead to some very interesting times in the next few months, given that the second half of the debt increase is subject to vote and as of the 22nd of December we’re a grand total of $113 billion from hitting the wall — again.  January is usually a month that Treasury runs a surplus due to tax payments, but you can still expect the clamoring — and games — to start up pretty much with the drop of the ball in Times Square.

Will the so-called “Tea Party” fold their claims of fiscal prudence once again?  You bet.  After all, they just did vote to blow a $200 billion hole in the deficit with the payroll tax cut extension — a vote that was taken by “unanimous consent” because not one Representative out of 435 thought it was more important to stand on principle and demand a recorded vote than it was to drink eggnog with those providing their bribes — er, “family and friends.”  You got that right folks — not one man or woman stood on principle.

Not one.

So we are consigned to the same sort of cock-n-bull game now that we were back in 2007, and 2008, and last year.  But Mr. Market doesn’t care.  He’s going to do what he’s going to do, and he’s issued his warnings — which were ignored.

So with that, here’s your 2012 Outrage List, and we’ll see how many I get right.

• We’re going down — and this time it’s not “buy the dip.”  The can-kicking will be attempted, of course, but we’re pretty-much out of policy tools — we used them.  Add in a peak in the profit cycle and the PPI pass-through and you’ve got trouble.  Formally, this is “market ends lower than it began.”  (The next four are verbatim repeats, as I said I would; these are marked with asterisks)  Note that there’s no place to hide overseas in equities either (see below.)
• * Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.  (Ed: Repeat from last year.)
• * Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2012 and the addict will go through withdrawal. (Ed: Yes, this is an actual “official” recession call.  Q2-Q4 timeframe.)
• * Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.  (Ed: The reports on this have already started.)
• * The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.  (Ed: Inventory levels are at record highs — not smart!)
• The fissures — if not outright failure — in the Euro Zone become realized.  I fully expect one or more nations to leave the Euro and there is a non-zero chance of an outright collapse.  Timing is the problem — I’ll go ahead and stick this in 2012 but may be early a year.  We’ll see.  Incidentally because of how I worded this Greece leaving is a “score” but I’m not thinking Greece here — try Spain or Italy on for size.
• A viable third-party candidate emerges and runs for President in 2012.  Viable is defined by votes.  1% doesn’t do it.  Double-digits does.  There’s the marker.
• Serious changes — and charges — will come out of the MF Global disaster.  I don’t know if Corzine will get indicted or not, but the light will go on within the regulatory and Congressional offices and a “burnt offering” will be made.  Maybe more than one or two.  The issue is the risk of a lockup in the commodity forward markets, which would be disastrous for the global economy (consider that such an event would make impossible buying an airline ticket for more than a month or so in advance, as just one example.)  In short this is prediction that we will see actual handcuffs.
• The Dollar will be flat to materially stronger.  Once again those calling for a sub-60 (or worse) dollar index will be wrong.  In short cash will be King.
• Housing will not recover.  That won’t stop government from continuing to try to hold prices up of course. Doesn’t matter — there’s no recovery in the offing on housing.
• There will be severe issues with subgroups who don’t get their “cheese.”  Whether this reaches the formal level of “riots” is open to some question but the impact won’t be.  It will be real and ongoing; the political season will definitely play into this as well.
• Lots of noise will be made about deficits and debt but real, effective moves toward addressing the problem will not be made.  The reason of course is that admitting that we’re addicted means cutting of the games — and that’s unacceptable to both sides of the political aisle.  As such actual effective movement will require the market to act.
• A real shooting conflict breaks out in the Middle East. I’ve got my suspicions on who starts it and why, but the story told in the papers has a less-than-50% chance of being the truth so I’ll leave that out.  Any large-scale shooting conflict counts (not a couple of cruise missiles or similar.)
• The Fed will back off and rates will rise.  The pressure will simply get too be too high; they’re aware of, I’m convinced, serious gaming and risk in the financial system and interconnection (e.g. MF Global) problems but will deduce they’ll never get away with another large-scale bailout.
• The squeeze in state and local funding will get materially worse.  This is going to be an interesting development to watch; the first real cracks of realization that big pension obligations to police, fire, teachers and similar will not be paid is odds-on to show up this year.  The wild card is how everyone involved deals with it; the blast radius is likely to be pretty wide.

Here ‘ya are — 15 for the New Year.  As always I reserve the right to revise and extend until 12/31 at 11:59 PM.

How people care to forget…..

Dec. 26 (Bloomberg) — Prime Minister Yoshihiko Noda faces escalating pressure to secure support for higher taxes after Japan’s budget plan for the next fiscal year showed a record dependence on borrowing.

The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction.

Oh, you mean like us?  A budget gap of some 40%, all-in, our legislature raiding Social Security funds to try to make the numbers look better and avoid cutting spending?

Does anyone remember when the Nikkei was pushing toward 40,000 and everyone thought happy days were here forever?  Then growth collapsed upon itself, government social spending did not decrease, and the market entered a period of fits and starts, yet today, some 20 years later, the Nikkei stands at 8,400 — and never saw a “3″ handle, say much less the vaunted “4″ it was reaching for — again.

Why?

Simple, really.  Government spending never came down.  Deficits never were cut.  The premise of “growth” was maintained as the foundation of economic policy, yet infinite exponential growth is impossible, whether it is growth in spending or growth in economic output.  It simply cannot happen because the land mass on which we live is finite and so are our resources.  While compound growth can go on for quite a while, it has an endpoint that must be accepted.

The “solution” taken when the “growth” mantra failed was financial repression, which in turn destroyed capital formation.  And now, with that having failed and near zero interest rates for more than a decade failing to revive that which was mathematically impossible, the demand is being heard to raise taxes instead of realigning the government to that which can actually be paid for.

In short the Japanese got fat, dumb and happy off government heroin.  Instead of acceptance of reality — that one cannot spend more than one makes — the people demanded more and more, and the government bought their votes with fiscally bankrupt policies.

Now the day of reckoning is at hand.

Should Japanese bond interest rates rise, the government will be instantly bankrupted.  Yet if the government tries to continue to run budget deficits of this sort, it will bankrupt itself one way or another.  Further repression means destruction of the standard of living through amazing rates of inflation, and since all such games are negative-sum, while this “works” in nominal terms it does exactly nothing for the people in real (purchasing power) terms.

Pay attention folks, because this mess is coming here, and soon.

Commentary:  The Federal Reserve juices speculators

This is part one of a two-part series by David Stockman.

GREENWICH, Conn. (MarketWatch) — Someone has to stop the Federal Reserve before it crushes what remains of America’s Main Street economy.

In the last few weeks alone, it launched two more financial sector pumping operations which will harm the real economy, even as these actions juice Wall Street’s speculative humors.

First, joining the central banking cartels’ market rigging operation in support of the yen, the Fed helped bail-out carry traders from a savage short-covering squeeze. Then, green lighting the big banks for another go-round of the dividend and share-buyback scam, it handsomely rewarded options traders who had been front-running this announcement for weeks.

Indeed, this sort of action is so blatant that the Fed might as well just look for a financial vein in the vicinity of 200 West St., and proceed straight-away to mainline the trading desks located there.

In any event, the yen intervention certainly had nothing to do with the evident distress of the Japanese people. What happened is that one of the potent engines of the global carry-trade — the massive use of the yen as a zero cost funding currency — backfired violently in response to the unexpected disasters in Japan.

Accordingly, this should have been a moment of condign punishment — wiping out years of speculative gains in heavily leveraged commodity and emerging market currency and equity wagers, and putting two-way risk back into the markets for so-called risk assets.

Instead, once again, speculators were reassured that in the global financial casino operated by the world’s central bankers, the house is always there for them—this time with an exchange rate cap on what would otherwise have been a catastrophic surge in their yen funding costs.

Is it any wonder, then, that the global economy is being pummeled by one speculative tsunami after the next? Ever since the latest surge was trigged last summer by the Jackson Hole smoke signals about QE2, the violence of the price action in the risk asset flavor of late — cotton, met coal, sugar, oil, coffee, copper, rice, corn, heating oil and the rest — has been stunning, with moves of 10% a week or more.

In the face of these ripping commodity index gains, the Fed’s argument that surging food costs are due to emerging market demand growth is just plain lame. Was there a worldwide fasting ritual going on during the months just before the August QE2 signals when food prices were much lower? And haven’t the EM economies been growing at their present pace for about the last 15 years now, not just the last seven months?

Similarly, the supply side has had its floods and droughts — like always. But these don’t explain the price action, either. Take Dr. Cooper’s own price chart during the past 12 months: last March the price was $3.60 per pound — after which it plummeted to $2.80 by July, rose to $4.60 by February and revisited $4.10 per pound.

That violent round trip does not chart Mr. Market’s considered assessment of long-term trends in mining capacity or end-use industrial consumption. Instead, it reflects central bank triggered speculative tides which begin on the futures exchanges and ripple out through inventory stocking and de-stocking actions all around the world — even reaching the speculative copper hoards maintained by Chinese pig farmers and the vandals who strip-mine copper from the abandoned tract homes in Phoenix.

The short-covering panic in the yen forex markets following Japan’s intervention, and the subsequent panicked response by the central banks, wasn’t just a low frequency outlier — the equivalent of an 8.9 event on the financial Richter scale. Rather, it is the predictable result of the lunatic ZIRP monetary policy which has been pursued by the Bank of Japan for more than a decade now–and with the Fed, BOE and ECB not far behind.

READ THE REST HERE

Tickerguy, Karl Denninger of the Market-Ticker and Co-Founder of FedUpUSA appeared on Neil Cavuto’s show on FoxBusiness last night with some news that most people here in the US are not even considering with regards to the disaster in Japan.

2011 has already been the most memorable year in ages and we haven’t even reached April yet.  Revolutions have swept the Middle East, an unprecedented earthquake and tsunami have hit Japan, civil war has erupted in Libya, the price of oil has been soaring and the entire globe is teetering on the brink of economic collapse.  It seems like almost everything that can be shaken is being shaken.  Unfortunately, it does not appear that things are going to settle down any time soon.  The Japanese economy has been dealt a critical blow, the European sovereign debt crisis could flare up again at any moment and the U.S. economy could potentially plunge into another recession by the end of the year.  The global economy and world financial markets were really struggling to recover even when things were relatively stable.  If all of this global instability gets even worse it could literally rip world financial markets apart.

Yes, things really are that bad.  The mainstream media has been really busy downplaying the economic impact of the disaster in Japan and the chaos in the Middle East, but the truth is that these events have huge implications for the global economy.  Today our world is more interconnected than ever, so economic pain in one area of the planet is going to have a significant effect on other areas of the globe.

The following are 10 economic disasters which could potentially rip world financial markets to shreds….

#1 War In Libya

Do you think that the “international community” would be intervening in Libya if they did not have a lot of oil?  If you actually believe that, you might want to review the last few decades of African history.  Millions upon millions of Africans have been slaughtered by incredibly repressive regimes and the “international community” did next to nothing about it.

But Libya is different.

Libya is the largest producer of oil in Africa.

Apparently the revolution in Libya was not going the way it was supposed to, so the U.S. and Europe are stepping in.

Moammar Gadhafi is vowing that this will be a “long war”, but the truth is that his forces don’t stand a chance against NATO.

Initially we were told that NATO would just be setting up a “no fly zone”, but there have already been reports of Libyan tank columns being assaulted and there has even been an air strike on Moammar Gadhafi’s personal compound in Tripoli.

So since when did a “no fly zone” include an attempt to kill a foreign head of state?

Let there be no mistake – the moment that the first Tomahawk cruise missiles were launched the United States declared war on Libya.

Already the Arab League, India, China and Russia have all objected to how this operation is being carried out and they are alarmed about the reports of civilian casualties.

Tensions around the globe are rising once again, and that is not a good thing for the world economy.

On a side note, does anyone recall anyone in the Obama administration even stopping for a moment to consider whether or not they should consult the U.S. Congress before starting another war?

The U.S. Constitution specifically requires the approval of the Congress before we go to war.

But very few people seem to care too much about what the U.S. Constitution says these days.

In any event, the flow of oil out of Libya is likely to be reduced for an extended period of time now, and that is not going to be good for a deeply struggling global economy.

#2 Revolutions In The Middle East

Protests just seem to keep spreading to more countries in the Middle East.  On Friday, five Syrian protesters were killed by government forces in the city of Daraa.  Subsequently, over the weekend thousands of protesters reportedly stormed government buildings in that city and set them on fire.

Things in the region just seem to get wilder and wilder.

Even in countries where the revolutions are supposed to be “over” there is still a lot of chaos.

Have you seen what has been going on in Egypt lately?

The truth is that all of North Africa and nearly the entire Middle East is aflame with revolutionary fervor.

About the only place where revolution has not broken out is in Saudi Arabia.  Of course it probably helps that the United States and Europe don’t really want a revolution in Saudi Arabia and the Saudis have a brutally effective secret police force.

In any event, as long as the chaos in the Middle East continues the price of oil is likely to remain very high, and that is not good news for the world economy.

#3 The Japanese Earthquake And Tsunami

Japan is the third largest economy in the world.  When a major disaster happens in that nation it has global implications.

The tsunami that just hit Japan was absolutely unprecedented.  Vast stretches of Japan have been more thoroughly destroyed than if they had been bombed by a foreign military power.  It really was a nation changing event.

The Japanese economy is going to be crippled for an extended period of time.  But it is not just Japan’s economy that has been deeply affected by this tragedy.

According to the Wall Street Journal, the recent disaster in Japan has caused supply chain disruptions all over the globe….

A shortage of Japanese-built electronic parts will force GM to close a plant in Zaragoza, Spain, on Monday and cancel shifts at a factory in Eisenach, Germany, on Monday and Tuesday, the company said Friday.

Not only that, GM has also suspended all “nonessential” spending globally as it evaluates the impact of this crisis.

The truth is that there are a whole host of industries that rely on parts from Japan.  Supply chains all over the world are going to have to be changed as a result of this crisis.  There are going to be some shortages of certain classes of products.

Japan is a nation that imports and exports tremendous quantities of goods.  At least for a while both imports and exports will be significantly down, and that is not good news for a world economy that was already having a really hard time recovering from the recent economic downturn.

#4 The Japan Nuclear Crisis

Even if the worst case scenario does not play out, the reality is that the crisis at the Fukushima Dai-ichi nuclear plant is going to have a long lasting impact on the global economy.

Already, nuclear power projects all over the world are being rethought.  The nuclear power industry was really starting to gain some momentum in many areas of the globe, but now that has totally changed.

But of much greater concern is the potential effect that all of this radiation will have on the Japanese people.  Radiation from the disaster at the Fukushima Dai-ichi nuclear plant is now showing up in food and tap water in Japan as an article on the website of USA Today recently described….

The government halted shipments of spinach from one area and raw milk from another near the nuclear plant after tests found iodine exceeded safety limits. But the contamination spread to spinach in three other prefectures and to more vegetables — canola and chrysanthemum greens. Tokyo’s tap water, where iodine turned up Friday, now has cesium.

Hopefully the authorities in Japan will be able to get this situation under control before Tokyo is affected too much.  The truth is that Tokyo is one of the most economically important cities on the planet.

But right now there is a lot of uncertainty surrounding Tokyo.  For example, one very large German real estate fund says that their holdings in Tokyo are now “impossible to value” and they have suspended all customer withdrawals from the fund.

Once again, let us hope that a worst case scenario does not happen.  But if we do get to the point where most of the population had to be evacuated from Tokyo for an extended period of time it would be absolutely devastating for the global economy.

#5 The Price Of Oil

Most people believe that the U.S. dollar is the currency of the world, but really it is oil.  Without oil, the global economy that we have constructed simply could not function.

That is why it was so alarming when the price of oil went above $100 a barrel earlier this year for the first time since 2008.  Virtually everyone agrees that if the price of oil stays high for an extended period of time it will have a highly negative impact on the world economy.

In particular, the U.S. economy is highly, highly dependent on cheap oil.  This country is really spread out and we transport goods and services over vast distances.  That is why the following facts are so alarming….

*The average price of a gallon of gasoline in the United States is now 75 cents higher than it was a year ago.

*In San Francisco, California, the average price of a gallon of gasoline is now $3.97.

*According to the Oil Price Information Service, U.S. drivers spent an average of $347 on gasoline during the month of February, which was 30 percent more than a year earlier.

*According to the U.S. Energy Department, the average U.S. household will spend approximately $700 more on gasoline in 2011 than it did during 2010.

#6 Food Inflation

Many people believe that the rapidly rising price of food has been a major factor in sparking the revolutions that we have seen in Africa and the Middle East.  When people cannot feed themselves or their families they tend to lose it.

According to the United Nations, the global price of food hit a new all-time high earlier this year, and the UN is expecting the price of food to continue to go up throughout the rest of this year.  Food supplies were already tight around the globe and this is certainly not going to help things.

The price of food has also been going up rapidly inside the United States.  Last month the price of food in the United States rose at the fastest rate in 36 years.

American families are really starting to feel their budgets stretched.  According to the U.S. Labor Department, the cost of living in the United States hit a brand new all-time record high in the month of February.

What this means is that U.S. families are going to have less discretionary income to spend at the stores and that is bad news for the world economy.

#7 The European Sovereign Debt Crisis

Several European governments have had their debt downgraded in the past several months.  Portugal, Spain, Greece and Ireland are all in big time trouble.  Several other European nations are not far behind them.

Right now Germany seems content to bail the “weak sisters” in Europe out, but if that changes at some point it is going to be an absolute nightmare for world financial markets.

#8 The Dying U.S. Dollar

Right now there is a lot of anxiety about the U.S. dollar.  Prior to the tsunami, Japan was one of the primary purchasers of U.S. government debt.  In fact, Japan was the second-largest foreign buyer of U.S. Treasuries last year.

But now as Japan rebuilds from this nightmare it is not going to have capital to invest overseas.  Someone else is going to have to step in and buy up all of the debt that the Japanese were buying.

Not only that, but big bond funds such as PIMCO have announced that they are stepping away from U.S. Treasuries at least for now.

So if Japan is not buying U.S. Treasuries and bond funds such as PIMCO are not buying U.S. Treasuries, then who is going to be buying them?

The U.S. government needs to borrow trillions of dollars this year alone to roll over existing debt and to finance new debt.  All of that borrowing has got to come from somewhere.

#9 The U.S. Housing Market

The U.S. housing market could potentially be on the verge of another major crisis.  Just consider the following facts….

*In February, U.S. housing starts experienced their largest decline in 27 years.

*Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.

*Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months.  Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.

*In September 2008, 33 percent of Americans knew someone who had been foreclosed upon or who was facing the threat of foreclosure.  Today that number has risen to 48 percent.

#10 The Derivatives Bubble

Most Americans do not even understand what derivatives are, but the truth is that they are one of the biggest threats to our financial system.  Some experts estimate that the worldwide derivatives bubble is somewhere in the neighborhood of a quadrillion dollars.  This bubble could burst at any time.  Right now we are watching the greatest financial casino in the history of the globe spin around and around and around and everyone is hoping that at some point it doesn’t stop.  Today, most money on Wall Street is not made by investing in good business ideas.  Rather, most money on Wall Street is now made by making shrewd bets.  Unfortunately, at some point the casino is going to come crashing down and the game will be over.

Most people simply do not realize how fragile the global economy is at this point.

The financial crash of 2008 was a devastating blow.  The next wave of the economic crisis could be even worse.

So what will the rest of 2011 bring?

Well, nobody knows for sure, but a lot of experts are not optimistic.

David Rosenberg, the chief economist at Gluskin Sheff and Associates, is warning that the second half of the year could be very rough for the global economy….

The Economic Collapse

From the BBC:

2226: The Yomiuri Shimbun newspaper, quoting a senior official of the ruling Democratic Party of Japan, said the US made the offer immediately after the disaster damaged Fukushima No 1 nuclear plant. According to the unnamed senior official, US support was based on dismantling the troubled reactors run by Tokyo Electric Power (TEPCO) some 250 km (155 miles) northeast of Tokyo. However, the government and TEPCO thought the cooling system could be restored by themselves, the report said.

Am I reading this right?

Our government demanded that the Japanese dismantle – that is, permanently remove – over five gigawatts of power in order to help them with a critical safety problem that had the potential to destroy 100 square miles of land and kill or injure thousands of people?

That as compensation for helping them we demanded that they cripple their electrical generating capacity on a permanent basis?

You have to be kidding me.

This is an extremely serious charge.  If it’s true it stands alone as grounds for impeachment and dismembering every single federal agency involved.

Perhaps this explains why the US Military and/or civilian authorities didn’t stick a couple of big-ass generators on a transport plane and get them over there, restoring power to the reactors within hours of the incident and avoiding all of the serious radiation and physical damage at the plant.

This allegation is ridiculously incendiary and demands an immediate and complete Congressional investigation.  Not only do the citizens of the United States deserve to know the truth (or falsity) of this charge (and who initiated it if it is false), but so do the Japanese people.

If this is how this man treats our friends – attempting to use a crisis threatening the lives of civilians to score a political point and advance his “green” agenda…..

The Market-Ticker

The authorities in Japan appear to be losing control of the situation at their crippled nuclear plant.

We know serious core-melt incidents have occurred in three of the reactors (1-3.)  These are bad and have economically destroyed the reactors, but none of that news is new, and my assessment of the issues and risks are unchanged on this basis.  Core melts, even catastrophic ones (and the two percentages of presumed damaged rods at the plants in question I’ve seen quoted fall into that category) are not sufficient to result in a generalized catastrophe in the environment.

However, it appears that there’s little evidence that TEPCO and other emergency responders are making any sort of progress in getting water feed back to the fuel pools stored near the reactors.  That’s an entirely different situation, and has now, in my opinion, escalated to an “all hands on deck” event.

The puzzling factor for the last couple of days has been that there have been no real response in getting water sources to the buildings – specifically, to those fuel pools.  There is no pressure (beyond the lift to the height of the pool) required to feed these as they’re open pools but the ability to replace water that boils off is absolutely essential in the absence of the normal heat exchange mechanism.

Actual facts on the ground have been difficult to come by, but one news flash came across late last night that implied what may be going on: TEPCO was reported to be deploying a maximum effort in building (!) a road to get fire engines to the plant.

Remember, this area got hit by a tsunami.  That’s bad.  Apparently, it is much worse in terms of access to the plant that has been let on.  While authorities have not said this, the destruction of three of the four fire engines at the plant by the explosion in Building 3 may have destroyed three of the only four fire engines that could reach the plant.

Rescue and recovery are important.  But unless the Japanese are prepared to abandon a 25-mile or so diameter area of land around this plant permanently (which incidentally means abandoning not only the stricken four units but six more that are undamaged and will be needed for recovery of the nation from this disaster they need to get this situation under control – right now.

Reports yesterday of radiation rate spikes at the plant were very troubling.  If you remember my missive from yesterday I said that the “gold standard” for a reason to get very nervous as to forward expectations were lethal-level radiation readings at the plant.  We’re now seeing them, albeit on an intermittent basis.  Thus far it appears they’re related to the release of steam from the shut down but hot reactors, specifically unit #3.

This will not be the case for a whole lot longer, however, if there is not meaningful progress on getting whatever infrastructure is necessary to provide water to the fuel pools restored and secured.  Again, this is a matter of being able to provide water in volume, but there is no pressure requirement (other than the pressure necessary to lift the water to the height where the pool is) as there is with providing a water feed into a containment building or primary reactor pressure vessel.

I give this situation about another 48 hours before it becomes essentially impossible to manage.  At this point it is likely that some people will have to sacrifice themselves intentionally in order to get the water feeds that are necessary in place and operating.  That number may be significant and the longer it takes before this task is accomplished the higher the count is going to go.

I believe it is time for TEPCO to be relieved of their management of this situation and for civil defense and/or the military to step in and take control of the response.  Irrespective of how or with what, including whatever loss of life may occur in establishing and maintaining water flow, cooling water must be secured on an immediate and continuing basis for the fuel pools.

For those who are in the United States there remains no reason to be alarmed by the events on the ground in terms of effects on human health here.  Scare-mongers are now peddling Potassium Iodide tablets on eBAY for over two hundred dollars for a package of tablets – more than 10x the usual price - and some people are selling expired lots.  This is utterly ridiculous; while there’s a reason to keep some of this substance around in the US in the event of a local nuclear incident there is no reason to buy it as a US resident in response to what is going on in Japan. 

This is not true, however, if you are in Japan.  The impact in that nation, should the authorities fail to get fuel pool water levels under control, is entirely determined by the direction of the wind.  So far it has been cooperative in that most of the radioactive products have been blown out to sea, and will be diluted in the Pacific.  This cannot be assured on an ongoing basis and, in my opinion, if you live within 100 miles of the plant it would be prudent to determine if you can increase that distance on an expedited basis should it become necessary.

The humanitarian problems for those within the tsunami impact zone are extremely serious; large swaths of land were inundated by the flood..  Nonetheless the priority focus at the present time must be to get water supplies secured for the fuel pools at all six plants.

Here in the United States the political debate is, of course, once again heating up.  We have not built a new nuclear plant since Three Mile Island.  Our existing plants are aging and will have to be eventually replaced.  At the same time we must deal with a need to improve our economic security through energy security.  We continue to stick our heads in the sand when it comes to a coherent energy policy for America, relying instead of a patchwork that involves far too many foreign entanglements. 

This must stop right here and now.

Nuclear power is not without risk.  It is, however, the only viable alternative we have at the present time, and the only one we’re likely to have for the foreseeable future, for base-load electrical generation.  There are, in my opinion, better alternatives than the present boiling-water reactor designs that are in common use, but we have been unwilling to have a clean debate on the alternatives and put forward the necessary expenditures and efforts.

The level of screaming from the “anti-nuke” camp has, as expected, increased markedly in volume over the last week.  False claims are being made, including raw acts of fraud such as the widely-distributed “map” that allegedly shows the entire population of the west coast being wiped out by a deadly radioactive cloud.  We must not, as a nation, allow hype and fear to form the basis on which we make decisions for our energy future.  The spent fuel problems at the Japanese plants, and those here in the United States, are largely of our own making as a direct and proximate consequence of our unwillingness to embrace and support reprocessing and re-use of nuclear fuel materials.  We are being treated to a demonstration of what refusal to acknowledge and deal with those risks, instead hiding them away in pools of water, can bring to a nation when things go horribly wrong, exactly as we got a demonstration of how hiding financial risks with “credit default swaps” and other similar games can blow up in your face during the economic crash of 2008. 

Incidentally, despite that lesson being taught in 2008 we have failed to learn from and act on it, and it will return with a vengeance much sooner than anyone (other than a few, like myself, who continue to see the deteriorating mathematical reality) expects.

We cannot make decisions predicated on irrational fear and exploitation of events to score political points.  No economy can survive and prosper without secure energy sources.  We have the technological ability to provide energy security but doing so will always involve the acceptance of risk.  Those who claim that the risks are unacceptable must be charged with producing an alternative that is defensible both economically and on a thermodynamic and physical level, and if they are unable to do so, their opinions, no matter how well-constructed, must be discarded and ignored.

As with so many matters in the economic realm in which children waving the “Armageddon” card have managed to literally rob the public of trillions of dollars, we must, on the energy front, put the howling children in their playpens, close the door behind them, and allow the adults to have a reasoned and logical conversation on the alternatives, including a robust debate on both risk and reward.

The Market-Ticker

The entire world is in a state of mourning today as details regarding the horrific damage caused by the massive tsunami in Japan continue to trickle in.  The magnitude 8.9 earthquake that caused the tsunami was the largest earthquake that Japan has ever experienced in modern times.  Waves as high as 30 feet swept over northern Japan.  The tsunami waters reached as far as 6 miles inland, and authorities have already recovered hundreds of dead bodies.  Those of us that have seen footage of this disaster on television will never forget it.  But this nightmare is not over yet.  There have been dozens of aftershocks, and many of them have been quite large.  In fact, there have been 19 earthquakes of at least magnitude 6.0 in the area over the last 24 hours.  So what is this disaster going to do to the 3rd largest economy in the world?  Japan already had a national debt that was well over 200 percent of GDP.  Could this be the “tipping point” that pushes the Japanese economy over the edge and into oblivion?

It is hard to assess the full scope of the damage to Japan at this point, but virtually everyone agrees that much of northern Japan is a complete and total disaster area at this point.  Many towns have essentially been destroyed.  Some are estimating that the economic damage from this disaster will be in the hundreds of billions of dollars.  Others believe that the final total will be in the trillions of dollars.

Fortunately, major cities such as Tokyo came through this event relatively unscathed and most of the major manufacturing facilities are not in the areas that were most directly affected by the earthquake and the tsunami.

But let there be no doubt, this was a nation-changing event.  Japan will never quite be the same again.

Also, it isn’t just Japan that will be affected by this.  The truth is that economic ripples from this event will be felt all over the world.

An economist from High Frequency Economics, Carl Weinberg, told AFP the following about the economic consequences of this disaster….

“There is no way to assess even the direct damage to Japan’s economy or to the global economy. This is a sad day for Japan, and economic aftershocks could affect the whole world’s economy.”

It is literally going to take months to figure out exactly how much damage has been done.  Let us just hope that we don’t see any more major earthquakes in the area.

The Japanese are a very resilient people and the Bank of Japan is already vowing that it will be doing whatever is necessary to ensure the stability of the financial markets.  The Bank of Japan has announced that it is going to provide as much liquidity as necessary to keep the Japanese economy functioning normally.

But the truth is that the Bank of Japan has already been printing money like crazy….

Is a tsunami of new yen really going to solve the economic damage that has been done by the earthquake and the tsunami?

Of course not.

The truth is that the economy of Japan was already deeply struggling before this disaster.

The national debt of Japan is now well over 200% of GDP and there seems to be no doubt that they will need to borrow massive amounts of money to deal with the aftermath of this crisis.

Up until now the Japanese government has been able to borrow money at ultra-low interest rates of around 1.30 percent for 10-year bonds, drawing on a huge pool of savings from its own citizens.

But in light of what has just happened, will the citizens of Japan still have enough resources to continue to fund the rampant spending of the Japanese government?

At this point, it is estimated that this gigantic mountain of debt breaks down to 7.5 million yen for every single citizen of Japan.

Politicians in Japan have been pledging for years to do something about all of this debt, but nobody has been able to make much progress.

Even before this disaster, the major credit rating agencies were warning that they may have to downgrade Japanese government debt.  The earthquake and the tsunami are certainly not going to make the Japanese even more credit-worthy.

Hideo Kumano, the chief economist at Dai-ichi Life Research Institute, has said that a “tipping point” will come when world financial markets finally recognize that the government of Japan simply cannot afford to service its debt any longer….

“It’s hard to predict when the bond market might collapse, but it would happen when the market judges that Japan’s ability to finance its debt is not sustainable anymore.”

Is the massive tsunami that just hit Japan such a tipping point?

Other countries such as Greece and Ireland would have already collapsed if it had not been for the massive international bailouts that they received.

So who is going to bail Japan out?

This could potentially be one of the greatest economic disasters that the world has seen since World War 2.

With the world already on the verge of a major financial collapse, this is the last thing that world financial markets needed.

In fact, much of the rest of the world had been hoping that an influx of capital from Japan would help to stabilize things.

For example, Japanese insurance companies had recently announced that they were planning on buying up lots of European sovereign debt, but now obviously those plans are on hold.  As a result of this disaster, Japanese insurance companies will be forced to sell off assets like crazy in order to pay settlements.  But as Zero Hedge is correctly pointing out, without Japanese financial institutions stepping in to soak up Eurozone bonds this is going to make the European sovereign debt crisis even worse.

But right now the focus in on the devastation in Japan.  At the moment it is unclear how much of the economic infrastructure of Japan has survived.

For example, as USA Today is reporting, some factories cannot even be reached by phone at this point….

Toyota’s phone calls to its plants in affected areas were not being answered, said Shiori Hashimoto, a spokeswoman in Tokyo. The Toyota City-based carmaker began production at a new plant in Miyagi this year that makes Yaris compact cars and has capacity to make 120,000 vehicles a year.

What is clear is that the cost of recovering and rebuilding after this disaster is going to put extraordinary financial stress on the Japanese government.

Julian Jessop of Capital Economics certainly does not sound optimistic about what this is going to mean for the Japanese economy….

“Japan’s economic recovery has lost momentum and a large part of the reconstruction costs will add to the government’s significant debt burden.”

Hopefully the full extent of the damage is not as bad as many are now fearing.

But the truth is that this is a huge, huge event for a world economy that was already on the verge of collapse.

May our thoughts and our prayers be with the Japanese people at this time.

This is truly one of the biggest disasters that any of us have ever seen, and Japan will never be the same again.

The Economic Collapse