Category: simonblack

December 12, 2014
Santiago, Chile

In the Grand Bazaar in Istanbul during the Ottoman Empire it was a familiar site to see a muhtesib or “market inspector” making his way through the stalls.

They were in charge of making sure that everything in the marketplace adhered to state regulations.

Accompanied by some members of the police force, every day they went around, carefully inspecting the activities of each seller to ensure that they were complying with the rules.

If they weren’t in compliance, the muhtesib would set his police thugs on them.

From regulation on the production and distribution of goods, to building codes, and price controls, these average people had their every action controlled by the government.

It didn’t take long for the Ottoman Empire to lose its competitive edge under the weight of these massive bureaucratic burdens.

This has happened to dozens of formerly dominant empires throughout history. And it’s happening in the Land of the Free today.

We may not have the same traditional market square with the imposing presence of the muhtesib. But don’t be fooled, he’s there.

The Competitive Enterprise Institute estimates that the total cost of complying with America’s federal regulations last year was $1.86 trillion.

That’s about $15,000 per household, more than what the average household pays on food, clothing, or shelter each year.

And the number of regulations is rapidly rising.

You might be rather surprised to know that there are a whopping 10,610 bills and resolutions currently before the 113th United States Congress.

But it’s more than that.

What a lot of people don’t realize is that executive agencies have their own ‘rule making’ authority.

Every single business day, in fact, dozens of new rules and regulations are proposed, almost none of which ever become public.

Just today alone, the current issue of the US government’s daily journal of rules (called the Federal Register) is 214 pages. And that’s actually pretty slim for Uncle Sam.

Over the last few days, we’ve seen new regulations about proper handling of Irish potatoes and toy magnet sets. It’s absurd.

For even the tiniest issue, bureaucrats and politicians jump to the rescue.

They “protect” us from bad haircuts, ugly interior designs, and slow-speaking auctioneers (just three examples of the over 1,000 occupations that require government licenses in the Land of the Free).

It’s as if they’re some kind of superhero here to save us from ourselves.

I can just picture it now—Bureaucrat Man! Swooping in to save the day with yet another regulation or piece of legislation!

Smashing anyone who tries to rent his/her apartment on Airbnb, Bureaucrat Man saves the citizens of New York from becoming victims of “greedy landlords”.

In San Francisco he makes sure that you’re qualified enough to—walk dogs, demanding that anyone walking more than four dogs have a valid ($375) permit.

In Florida, Bureaucrat Man ensures that giving food to the homeless is done according to rules and regulations; otherwise you get arrested for your act of indecency, just like a 90-year old man was recently.

Heck of a job, Bureaucrat Man. Noble in his intentions, incompetent in his actions, and ruthless in his enforcement.

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December 11, 2014
Santiago, Chile

Exactly 199 years ago, in 1815, a “temporary” committee was established in the US Senate called the Committee on Finance and Uniform National Currency.

It was set up to address economic issues and the debt accrued by the US government after the War of 1812.

Of course, because there’s nothing more permanent than a temporary government measure, the committee became a permanent one after just one year.

It soon expanded its role from raising tariffs to having influence over taxation, banking, currency, and appropriations.

In subsequent wars, notably the American Civil War, the Committee was quick to use its powers and introduced the union’s first income tax. They also detached the dollar from gold to help fund the war.

This was all an indication of things to come.

Over the subsequent decades there was a sustained push to finally establish the country’s central bank that will control money and credit, as well as institute a permanent income tax to feed the expanding aspirations of government.

They succeeded in 1913 when the Federal Reserve Act was passed and the 16th Amendment ratified, binding the country in the shackles of central banking and taxation of income.

Over the century that followed, the US has gone from being the biggest creditor in the world to its biggest debtor.

Decades of expanding government programs, waste, endless and costly wars, etc. have racked up such an enormous pile of debt that it has become almost impossible to pay it down.

A lot of folks don’t realize that, since the end of World War II, the US government’s total tax revenue has been almost constant at roughly 17% of GDP.

In other words, even though the actual tax rates themselves rise and fall, the government’s ‘slice’ of the economic pie is almost always the same—17%.

I’ve worked out a mathematical model which shows that, even with absurd assumptions (7%+ GDP growth for years at a time, low interest rates, etc.), it is simply not feasible for the US government to ‘grow’ its way out.

Default has become the only option. And that could mean a number of things.

They could default on their creditors (other governments like China who loaned money to the US government). But this would spark a global financial and banking crisis.

They could default on the Federal Reserve, which owns trillions of dollars of US debt. But this would create an epic currency crisis for the US dollar.

They could also default on their obligations to their citizens—primarily to future beneficiaries of Social Security (who collectively own trillions of dollars of US debt).

Or they could choose to default on their obligations to every human being alive who holds US dollars… and engineer rampant inflation.

None of these is a good option. And simply put, the US government has reached a point of no return.

I aim to demonstrate this to you in today’s video podcast episode. It’s a very sobering realization. Join me to see it for yourself: http://www.sovereignman.com/podcast/can-the-us-ever-pay-off-its-debt-video-15730/

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December 10, 2014
Santiago, Chile

As the holiday season approaches you might have mistletoe on your mind for cheery, romantic reasons.

What you might not have known however is that the festive flora and its relatives are all actually parasites.

Unable to photosynthesize to feed itself, mistletoe latches on to a host plant and steals away its nutrients and water.

From the mistletoe’s point of view this may seem like a great idea… for a while.

Depleted of nutrients, the host’s growth is stunted. Branches fall off. And eventually if the mistletoe grows large enough, the entire host plant just dies.

Thus, mistletoe can quite literally eat its own self out of house and home. This isn’t exactly a solid long-term strategy.

Given their behavior it seems that most governments belong to the same genus.

The public sector has no ability to support itself. In theory, they’re supposed to survive by taking a modest portion of people’s earnings through taxation, and then providing valuable services in exchange.

Nature calls this ‘symbiosis’. But life rarely follows theory.

In reality, bureaucrats and politicians who produce nothing of value parasitically choke off the productive class through onerous taxation and regulation.

This cannot last forever, because at some point they will have no hosts left to feed off of.

Ukraine is the perfect example of this right now.

In a leaked version of a new budget proposal (in Ukrainian), we are seeing the drastic extent to which bankrupt governments feed on their hosts.

The proposal includes measures to cut public education in Ukraine from 11 to 9 years. And more importantly, education will no longer be funded by the state.

There will be no more free food for children in school or for patients in hospitals, and healthcare will no longer be completely state-funded.

The government is also proposing to drastically reduce pension benefits.

Women will have to work 10 more years in order to qualify for a pension, and men an additional 5.

They’re also proposing to FREEZE pension benefits, i.e. no longer adjusting them to the rampant inflation that’s unfolding in Ukraine.

They’d also like to do away with a number of other public services; they’ve proposed slashing the number of judges, prosecutors, and police.

They’ve even proposed reducing the number of members of parliament from 450 to 150.

Now, I happen to quite like the idea that a government is pulling itself out of the business of education, healthcare, security, etc.

But it begs the question—if the government is no longer going to provide these services… then why the hell should anyone have to pay tax?

Of course, taxes are still obligatory.

So on one hand the government is defaulting on all the obligations it has made to its citizens… essentially breaking the social contract.

Yet on the other hand they’re still going to throw people in jail for not paying taxes.

Just like mistletoe, this is a highly parasitic relationship. And it’s precisely what happens when a country goes bankrupt.

Ukraine is in this position for a number of reasons; certainly the war has been very costly and has wrecked havoc on the economy.

But Ukraine’s government has had a long history of pitifully bad decisions, corruption, and fiscal mismanagement. [stop me when this sounds familiar]

At this point they’ve managed to blow the vast majority of their foreign reserves (i.e. the country’s US dollar cash savings).

In fact, as of this morning, Ukraine’s total foreign reserves amount to just 0.34% of its enormous debt level.

This is barely enough to pay interest on the debt for the next six weeks! Astounding.

Oh… wait a minute. Hang on. I got my data wrong. I’m actually talking about the United States.

Fact is, Ukraine has $10 billion in foreign reserves on $70 billion in debt. That’s 14.2%.

The United States, on the other hand, has $61 billion in cash in its operating account [less than Apple], which equals 0.34% of its $18 TRILLION debt.

Nothing to worry about, though.

I’m sure that the rest of the world will continue to give the Land of the Free a pass.

It makes total sense that Ukraine is in the midst of an epic financial crisis, even though the US government is in far worse financial condition.

Because there are absolutely zero problems whatsoever with the US government being admittedly insolvent, highly illiquid, warmongering, and deceitful to even its own allies.

This is a consequence-free environment. Nothing to see here, people; you should have zero concerns about having 100% of your savings and assets tied to a bankrupt government that’s in worse shape than Ukraine’s. What could go wrong?

Hey look over there! It’s Kim Kardashian’s buttocks!

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December 10, 2014
Santiago, Chile

When Karl Marx wrote about the bourgeoisie as the “unproductive class” he was writing from personal experience.

The foremost champion of the proletariat, Marx never actually belonged to the working class himself.

Born into a well-off middle-class family, Marx ascended up the social hierarchy by marrying into Prussian aristocracy.

Seven kids later, a lavish lifestyle, and an unwillingness to hold down a job, he found himself deeply in debt, only to be saved by the generosity of his friend Friederich Engels.

Engels found Marx’s ideology so amusing he offered to pay off his friend’s debts AND give him an annual stipend of £350.

That may sound like a paltry figure in today’s terms, but at the time, this was a sizeable sum.

Back then Britain was on the gold standard, meaning that those paper notes were attached to something with weightier value.

The price of an ounce of gold at the time was fixed at £4.24.

So in gold terms, Marx was offered a lush 82.55 ounces of gold per year. And back then, you could actually redeem paper currency for gold.

So while £350 doesn’t even register a week’s wages anymore, the 82.55 ounces of gold that Marx’s stipend was worth is valued at nearly $100,000 per year in today’s money.

(I wonder if the Occupy movement would have included him amongst their ranks, given that this salary nearly puts him in the top 1% at the time)

As Marx ironically shows, paper does not stand the test of time. Gold does.

This of course defies mainstream thinking. We should all feel excited and privileged to hold paper. We’re told that gold is a barbarous relic.

Ben Bernanke once told Congress that he doesn’t “pretend to understand gold prices.”

There’s not really much to understand. Are your pieces of paper really going to be worth anything 150 years from now? Probably not.

If you want your savings and wealth to actually hold value over the long-term, follow the example from the father of communism and enemy of private property: own some gold.

And then to really be sure it gets to your grandkids, check out where are the safest places in the world to store your gold offshore.

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December 9, 2014
Santiago, Chile

In the moment after the musicians finished their last song, the silence was broken by the faint tune of someone singing “Mu isamaa on minu arm”.

The singers on stage quickly looked at each other nervously, but seeing strength in each other’s eyes they began to join in.

The year was 1969, and the Soviet leadership that held control over Estonia had banned this patriotic song. Singing it was a crime.

Yet an entire crowd of people defied the secret police and sang it anyway, sparking a peaceful rebellion against an oppressive system.

This seems to be the Estonian way. And today the country is making another unique stand against the existing system.

This time rather than fighting against Soviet domination, they are rebelling against the anti-business, anti-freedom policies of governments across the world.

Doing what has never been done before, the Estonian government has recently introduced an “e-residency” program for foreigners.

The idea is to enable people from around the world to very simply establish a unique digital presence in the country, and then carry the benefits of that with them wherever they go in the world.

E-residency is not the same as traditional residency. We’re not talking about actually moving to Estonia.

But the government there understands that in today’s world, geography is not particularly relevant.

We all have digital personas with which we transact business and engage with one another. So what if your ‘digital self’ could actually ‘live’ somewhere and have rights, privileges, and benefits?

That’s precisely what Estonia’s government is trying to do.

E-residents are issued a digital card that allows the holders to do things like:

• Register an Estonian business online in minutes
• Operate your Estonian company overseas via the Internet (e.g filing taxes, doing 
accounting, signing papers)
• Open an Estonian bank account and use it online (banking is great in Estonia, with a number of banks offering “Startup Packages”, immediate payment processing, and with worldwide wires costing only 6 euros)
• Sign contracts online by using a digital signature.

Given that corporate income taxes for undistributed profits in Estonia are zero, this is a massive perk to any entrepreneur or anyone interested in diversifying where they bank and source their income.

Estonia wants to make it easy for you to start your business and make money.

At the moment, to apply for the e-residency you need to go to Estonia in person. The whole process takes less than two weeks and costs just 50 euros.

But starting in 2015, you’ll be able to submit your application for e-residency at any Estonian embassy or consulate around the world.

This is a trend we’re seeing play out with increasing regularity.

The current system is based on racking up massive amounts of debt, conjuring money out of thin air, and coercing people with big militaries to use it.

Today the antique nations of the Western hierarchy (primarily the US and Western Europe) do everything they can to drive away talent, productive businesses, and innovation.

They create Byzantine regulations, excessive bureaucracy, and punitive taxes.

But that system is on the way out.

The new system breaks down borders. Geography becomes less relevant.

And governments are actually forced to compete with one another to attract talented residents and businesses.

That’s the future. And it’s already happening.

Panama, for example, has a fantastic program called the “Friendly Nations Visa” whereby people from dozens of countries can obtain residency quickly and easily.

Here in Chile, almost any foreigner can obtain instant permission to work.

Across Asia, in places like Malaysia and the Philippines, governments have created programs to attract retirees.

And even in bankrupt Europe, governments have created special tax incentives for foreign investors to mop up all of the excess housing liquidity in places like Spain, Greece, and Portugal.

Despite the accelerated onslaught on freedom and opportunity across the Western world, there are places that recognize they have to compete for the best and are following up with action.

Estonia is really taking things to the next level with e-residency, and it’s an encouraging sign of where this trend is headed over the long-term.

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December 9, 2014
Santiago, Chile

When Gregor MacGregor returned to London he was a real celebrity.

He had just come back from the New World, where he had a number of successful exploits fighting in the South American struggle for independence and was made the Major-General of the Venezuelan republican army by Simon Bolivar—the leader of Latin America’s independence movement.

From within the dinge of Britain, the New World seemed like the land of both sunshine and wealth.

A number of Latin American countries were gaining independence at the time, and investors were frantically trying to get in early to capitalize on the opportunities overseas. The was the first emerging markets frenzy among investors.

When MacGregor, from his first-hand experiences there, told people of the new country of Poyais—where the climate was mild, the natives were friendly, the water pure, and the land fertile and abundant with high-quality timber—it seemed like there could be no better investment.

So in 1822, when he offered a £200,000 Poyais bond at 6%—twice the rate that British government bonds were going for at the time—who could resist?

It didn’t matter that the government of Poyais had no record of collecting taxes nor did it have any systems in place to raise revenue. The bonds would be easily paid back through export-taxes on the resources being shipped back to Europe.

It didn’t matter that the country had not been developed. There were hundreds of people signing up to build up the settlement there.

It didn’t even matter that the country didn’t actually exist.

The bonds were quickly sold and seven ships of people set out for this land of false promises.

The swindle inevitably came to light a few months later, though initially from a decline in confidence over Latin America as a whole rather than the discovery of Poyais’ non-existence.

And as the value of the fraudulent bonds plummeted, MacGregor simply skipped town to Paris, where he implemented the same scheme yet again.

In total, selling bonds for this fake country he made up he was able to raise £1.3 million, which in terms of the size of the British economy, is comparable to about £3.6 billion today.

Thousands of people lost all of their money believing in his well-orchestrated scheme, and some even lost their lives trying to find this land of opportunity to settle.

Though the country is very real, the US government’s ability to repay its bonds is just as fictional as that of Poyais.

The amount of debt it has accumulated has just surpassed the $18 trillion mark, which no level of taxation or economic growth could ever pay off.

And given that Treasury yields are below even the government’s own official rate of inflation, investing in US debt means not only will you not make money in the future, but you’re also losing money by the day.

This is hands down the worst investment out there, yet so many still pile their money into it.

Just as the Poyais’ scheme was unraveled by skepticism of Latin American bonds overall, the spark that turns the trust of US government finances into dust can come from a decline in confidence anywhere in the system.

You could easily brand the hopeful investors and settlers of Poyais as gullible. And there was a clear information mismatch and a lot of unknowns that fraudulent peddlers like MacGregor could take advantage of.

But loaning money on losing terms to the biggest debtor in history that has practically no mathematical chance of ever repaying it today – when all the facts are out there for everyone to see – is a much bigger insult to reason.

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December 8, 2014
London, England

[Editor’s note: This letter was written by Tim Price, London-based wealth manager and editor of Price Value International.]

You can be for gold, or you can be for paper, but you cannot possibly be for both. It may soon be time to take a stand.

The arguments in favour of gold are well known. Yet they are widely ignored by the paperbugs, who have a curious belief system given that its end product (paper currency) is destined to fail. We just do not know precisely when.

The price of gold is weakly correlated to other prices in financial markets, as the last three years have clearly demonstrated.

Indeed gold may be the only asset whose price is being suppressed by the monetary authorities, as opposed to those sundry instruments whose prices are being just as artificially inflated to offer the illusion of health in the financial system (stocks and bonds being the primary financial victims).

Beware appearances in an unhinged financial system, because they can be dangerously deceptive.

It is quite easy to manipulate the paper price of gold on a financial futures exchange if you never have to make delivery of the physical asset and are content to play games with paper.

At some point that will change.

Contrary to popular belief, gold is supremely liquid, though its supply is not inexhaustible.

It is no-one’s liability – this aspect may be one of the most crucial in the months to come, as and when investors learn to start fearing counterparty risk all over again.

Gold offers a degree of protection against uncertainty. And unlike paper money, there are fundamental and finite limits to its creation and supply.

What protection? There is, of course, one argument against gold that seems to trump all others and blares loudly to skeptical ears.

Its price in US dollars has recently fallen. Not in rubles, and not perhaps in yen, of course, but certainly in US dollars.

Perhaps gold is really a currency, then, as opposed to a tiresome commodity? But the belief system of the paperbug dies hard.

The curious might ask why so many central banks are busily repatriating their gold? Or why so any Asian central banks are busily accumulating it?

It is surely not just, in Ben Bernanke’s weasel words, tradition?

If you plot the assets of central banks against the gold price, you see a more or less perfect fit going back at least to 2002.

It is almost as if gold were linked in some way to money. That correlative trend for some reason broke down in 2012 and has yet to re-emerge.

We think it will return, because 6,000 years of human history weigh heavily in its favour.

Or you can put your faith in paper. History, however, would not recommend it. Fiat money has a 100% failure rate.

Please note that we are not advocating gold to the exclusion of all else within the context of a balanced investment portfolio.

There is a role for objectively creditworthy debt, especially if deflation really does take hold – it’s just that the provision of objectively creditworthy bonds in a global debt bubble is now vanishingly small.

There is a role for listed businesses run by principled, decent management, where the market’s assessment of value for those businesses sits comfortably below those businesses’ intrinsic worth.

But you need to look far and wide for such opportunities, because six years of central and commercial banks playing games with paper have made many stock markets thoroughly unattractive to the discerning value investor.

We suggest looking in Asia.

As investors we are all trapped within a horrifying bubble. We must play the hand we’ve been dealt, however bad it is.

But there are now growing signs of end-of-bubble instability. The system does not appear remotely sound.

Since political vision in Europe, in particular, is clearly absent, the field has been left to central bankers to run amok.

The only question we cannot answer is: precisely when does the centre fail?

The correct response is to recall the words of the famed value investor Peter Cundill, when he confided in his diary:

“The most important attribute for success in value investing is patience, patience, and more patience. THE MAJORITY OF INVESTORS DO NOT POSSESS THIS CHARACTERISTIC.”

But the absence of patience by the majority of investors is fine, because it leaves more money on the table for the rest of us.

The only question remaining is: in what exact form should we hold that money?

Be patient. And consider the words of James Grant from his quietly passionate and wonderfully articulate Cato Institute speech:

“What will futurity make of the Ph.D. standard? Likely, it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence – after the Crash of, say, 2016, that wiped out the youngster’s inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal Reserve’s methods.

“I expect you’ll wind up saying something like this: “My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called ‘price stability’ (this was on the eve of the hyperinflation of 2017). We seem to have miscalculated.”

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December 5, 2014
Santiago, Chile

It seems rather appropriate that just seven days after the US government hit a whopping $18 trillion in debt, mainstream financial media has picked up the IMF’s recent World Economic Outlook report, which puts the US economy as #2 in the world.

There’s no shortage of ostriches out there who come up with every reason in the world why this doesn’t matter.

They say, ‘oh the IMF is just reporting purchasing power parity.’ Or, ‘oh it’s the per capita GDP that it counts.’

But the obvious truth is that the US is in decline. And it’s being overtaken.

1,000 years ago when Europe was just a tribal backwater with local warlords duking it out over salt mines, Asia was the center of wealth, power and civilization.

China continued to be the largest economy in the world up through 1870.

That changed. The West overtook the East in terms of power and influence and it remained that way for centuries.

Now things are changing once again. The West, and the US in particular, is plagued by:

Insane debt levels, which the government has been accumulating at faster and faster rates, hitting an unprecedented $18 trillion in debt this past week.

Short-sighted monetary policy, from quantitative easing that has debased the currency to negative interest rates that have wiped out any reason to be smart with money.

A crippled economy, as Western nations’ oppressive taxation frightens away the productive, and handouts have created a society of dependency.

Global bullying, as the US spies on its own citizens and allies, compelling businesses and governments to terminate their relationships with the Land of the Free.

Waging endless wars, whether against nouns (‘terrorism’), plants (‘drugs’), and brown people on the other side of the planet who supposedly hate us for our freedom. If they only knew…

A population that lives in fear, as you are more likely to get shot by your own police in the United States today than to ever even see a terrorist.

It’s pretty hard to maintain the top spot when that’s what you stand for.

China obviously has its own substantial problems, but over the last several decades one thing is for certain—China (and Asia in general) is a place where production and savings are valued.

The universal law of wealth is to produce more than you consume. The West has completely broken that.

They’re trying to replace it with debt, war and intimidation. And we’re now only just starting to scratch the surface of the consequences that this brings.

History shows that every time this happens, governments in power will do anything they can to maintain the status quo and keep the party going just a little bit longer.

Do you have an obligation, simply by an accident of birth, to go down with the sinking ship?

Do you owe desperate politicians a greater share of your livelihood so they can blow it on even more war, police and spying?

Or is your primary obligation to your family and your loved ones?

The truth is that all the tools and all the resources exist to disconnect from this economic Hindenburg.

You can choose to either be an unwilling participant in its continued unraveling. Or, to be a curious spectator, having take steps to protect what you’ve worked your entire life to build. The choice is yours.

---

 

See also how the Japanese government has backed itself into a corner. There’s no way out. It’s game over, Japan.

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December 5, 2014
Santiago, Chile

Making up the highest stratosphere in Japanese society, the samurai had quite a reputation to uphold.

Beyond honor and loyalty, they had to keep up appearances by wearing only the highest quality clothing and by being seen in only the best establishments.

The samurai image did not come cheap, often requiring more than their simple stipends could afford.

Thus it became quite common for samurai during the Tokugawa period to rack up large debts from merchant lenders in order to fund the lifestyles that were expected of them.

If a samurai didn’t feel like paying off those debts, however, he could simply have them slashed, with the merchants taking the hit.

The courts didn’t care about the merchants. They were at the bottom of the social hierarchy, and their profit-making activities were not nearly as noble as those of the samurai.

While merchants suffered due to a lack of respect for their activities, peasants suffered in spite of great respect for theirs. Held in high regard as the true producers in society, they were honored by bearing almost the entire population’s tax burden.

This system, where the productive were continually punished, simply couldn’t last. And it didn’t, with the Tokugawa shogunate brought to an end with the Meiji Restoration in 1868.

Yet these lessons have quickly been forgotten, as nearly 150 years later, the same unsustainable practices continue to plague Japan.

The disdain for the productive class is apparent in the heavy taxation of businesses and individuals, while public sector debt has ballooned to well more than double the size of the entire economy.

And just as the samurai escaped paying their bills before, the tradition of screwing over creditors continues today.

The stated amount of the debt might not be slashed, but as the government prints money to repay their creditors, the value of what they repay is worth increasingly less.

Shirking on debt is now an institutionalized part of the system. Today the Japanese government doesn’t just admit to having inflation, it’s one of its key objectives in order to stay afloat.

The Japanese government is walking on a sword’s edge, though. On one hand they need inflation to be able to keep the debt repayments going, but on the other, by pushing for higher inflation they’re inevitably pushing for higher interest rates as well—meaning higher debt payments.

They’ve backed themselves into a corner.

This system clearly has an expiration date, one that’s long past due.

As it is, over 25% of Japan’s tax revenue goes towards just the INTEREST on the debt.

Remember, the late Ottoman Empire’s fiscal situation spiraled out of control just in a matter of years, to the point when they were paying 52% of their tax revenue just to pay interest on the debt in 1877. And at that point they were finished. They defaulted that year.

In April, the Japanese government raised the sales tax rate from 5% to 8%, which while doing nothing for the government’s ability to cover debt payments, did significant damage on the country’s growth in terms of GDP.

Clearly that didn’t work out very well, so they’re postponing the planned second increase in the sales tax.

But by doing that, the country’s credit rating was promptly downgraded by Moody’s.

While it’s astonishing that Japan’s rating is still as high as it is, the shift downwards is critical.

This is the beginning of the end. The Japanese government is running out of moves. If they raise taxes, they lose growth; if they don’t, they lose the last remaining shred of confidence from investors that they’ll ever make good on their debt.

Game over, Japan. Hara-kiri seems to be the only option at this point.

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