Saturday, January 16, 2010

A hyperinflation forecast

Is Japan headed for hyperinflation?
The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.
The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”
 Japan is funding over a third of its government expenditures with borrowing (as is the U.S. in 2009), and in the past countries that fund at that level for several years are prone to hyperinflation. Japan has been a heavy saver, but demography should be reducing their ability to save--the percentage of the population that is retired is rising, and they will be drawing down savings. Right now think look OK because interest rates are so very low, but if they begin to rise, Japan's financial sitution my blow up.

Demographic decline presents serious problems to welfare states, especially if they have heavy debt. We will see how it works out for several countries in the next decade.

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