World Central Banks Facilitating Huge Deficits

Central Banks Facilitating Huge Deficits 

World Central banks are making it easy for governments to spend huge amounts of money that they don't have. There is no need for any spending reforms or restraint while the Central banks are printing money ad infinitum.

The Central banks all over the world are also limiting the rise of interest rates and interest payments on their debts.  Zero interest rates are limiting the cost of servicing the rapidly rising debt.

The US's cost for interest payments back in 2008 was $451 billion, when interest rates were "normal" but the national debt was about $10 Trillion. In a few more years, we'll have $20 Trillion in debt---double the debt of 2008.  So, if interest rates were "normal" than interest payments on the debt would be DOUBLE the amount in 2008 or $900 Billion!!  Mind you, our current defense budget is $680 billion.  Our entire Federal tax collection is only $2400 billion, so $900 billion is a huge number.

What happens if inflation picks up sharply (the last thing anyone is expecting at the moment) and/or the bond market revolts and demands 10% on government bonds?  Interest payments could jump to about $2,000 billion per annum!  The debt that we're creating doesn't go away!  Debt is like a stone around your neck!

A worse example: take Japan, with 230 percent debt-to-GDP ratio, a rise of interest rates from about 1.0% currently to just 2 % would consume half of their annual budget.. The Japanese are already borrowing 10% of their GDP per annum, so debt is already accumulating rapidly.  In terms of debt sustainability, they are rapidly moving up the time when they reach a point of no return.  It's getting close.

More details about the Japanese budget situation from Forbes,

In the FY 2011 ordinary budget expenditures total JPY 92.4 trillion. Of this, JPY 28.7 trillion (31.1 percent) is expenditure for old age social security programs, and JPY 21.5 trillion (around 25 percent) is debt service. A doubling of interest rates would double debt service costs to 50 percent of budget. Is this feasible? Obviously not.

But the situation is actually direr still, as we see by looking at FY 2011 budget “revenues.” Of the JPY 92.4 trillion in revenues, only JPY 48.1 trillion has come from taxes. The remaining JPY 44.3 trillion has come from additional government debt issuance.

Huge Japanese QE Program

The Japanese Central bank recently has embarked on a HUGE quantitative easing (money printing) program that is 3 times the magnitude of the US QE program in relation to the size of their economy.  They aim to go from -0.5% deflation to 2% inflation.  If they succeed and investors demand 2 or 3% for holding government bonds (as opposed to the 0.5 to 1% range of yields currently), they are deep, deep budget trouble.  One might expect their rates to rise to Italian or Spanish levels of about 5% when their situation is "distressed."

It's entirely possible that the Japanese will trigger an unmanageable crisis in their debt markets.  Already the Japanese bond market is in turmoil already---having huge and unprecedented price swings that are triggering circuit breakers nearly every day.   I've said for 3 years now that Europe will be the epicenter for the next leg of the financial crisis.  I believe it's still true, but now Japan is in contention for that prize.

The flood of free money in Japan may fund a carry trade to other Asian countries---precisely what caused the Asian crisis of 1997.   Like I've said, free money and zero interest rates create bubbles on top of bubbles.