U.S. Future After Debt Default Could Reflect Japan’s Bleakness

U.S. Future After Debt Default Could Reflect Japan’s Bleakness

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HONG KONG -- When asked whether the Japanese yen is rising or falling, the money changer Chan Hing answered -- to my dismay -- with a broad smile and gleaming eyes: "The yen is going up every day."

Surges in foreign-exchange rates are what drive profits along the row of windows on "Money Street” in Hong Kong’s downtown Sheung Wan district. The losers are those like myself who, for whatever reason, wait to convert their Hong Kong banknotes, which are pegged to the U.S. dollar, into yen or yuan, the mainland Chinese currency.

Although the damaged nuclear reactors at Fukushima are still melting down and causing endless havoc for the Japanese economy, the yen still rises. The currency's upward movement may seem enigmatic, but the reason is simple: Default fears are prompting Japanese-owned manufacturers, banks and brokerages in the United States to cash out of dollars and repatriate their funds back to Japan.

Dollars by the billions are being dumped and the mint at Bank of Japan can't print money fast enough to meet the demand.

Imports Cheaper—and Not Radioactive

For me, as an occasional visitor to Japan, and thus a somewhat atypical consumer, the higher cost of yen is offset by the lower price tags on imported goods in Japanese convenience stores. For example, a bottle of red Chilean wine is now about 500 yen ($6 in the United States), or 10 times the amount of less than a decade ago.

A strong currency in Japan is especially helpful on the pocketbook at a time when imported food is far preferable to radioactive local meat, fish, vegetables and fruit.

Retail prices in Japan at restaurants and clothing stores are the same and more often less than when I worked there during the tail end of the "bubble economy" in the early 1990s.

Besides the strong yen, affordable prices are promoted by declining demand because the Japanese population is diminishing. On average, every woman of childbearing age has only one child. Families need to produce two children to maintain a nation's population level.

The high dosages of radiation across most of Japan -- far more widespread and severe than reported by the government – will probably deplete human numbers further, since current and future generations are unlikely to risk bearing "monster embryos."

The declining birthrate means that there will be even fewer young workers in the near future to contribute to pension plans for the aging population. Instead of encouraging an inflow of youthful immigrants, Japanese corporations have been moving labor-critical factories into other consumer markets -- North America, Europe, China, Southeast Asia and so on.

With the subsequent loss of its income-tax base, the Japanese government is running yearly deficits and borrowing money from the public through bond sales. As a consequence, Japan's public debt stands at more than 200 percent of its gross domestic product (GDP), equivalent to $2.4 trillion in the United States. The major asset owned by the Japanese government is its $912 billion stake in U.S. Treasury Bonds, or somewhere between half and a third of its own public debt.

Double Suicide

Were the U.S. government to default on its repayment of principal and interest to Japan, the result would be a double suicide.

Both national economies would be worse off than flat broke because the money is owed to their banks. Major banks would become insolvent. If the major banks tumble like a house of cards, American savers are told that deposits are insured up to $250,000. That's assuming the Federal Deposit Insurance Corporation and its underwriters have the liquidity to cover a major run on the banks. Remember Fannie Mae and Freddie were also hyped as being bullet proof.

Meanwhile, the stock markets could vaporize and major corporations declare bankruptcy and be forced to fire their workers.

The Greek tragedy of economic depression and violent riots will therefore probably not happen. If the U.S. government fails to raise its debt ceiling, the nation's largest employer (the federal government) will lay off many of its 2.1 million employees, sending them into oblivion with a string of empty promises.

Of course, the U.S. Treasury's foreign creditors, such as China, Japan and Britain would be promptly repaid when bonds mature and come due, because the Federal Reserve can simply print more money without informing Congress.

Thus, the default threat will not be a genuine default for lenders, unlike the financial collapses that forced austerity on Brazil and Mexico in the 1970s. Brazil's drastic budget cust actually wiped out their industries, an impossible situation that eventually forced Western bankers to write off much of that country's foreign debt.

The losers will not be Asian banks but the American public, which depends on essential services and employment from the U.S. government. In the ongoing debt crisis in Greece, it is the locals who are squeezed while the German and French banks are being repaid on time. Why should America act any differently? This was the case with the U.S. financial bailouts over the last three years.

Foreigners' earnings from Treasury bonds will probably not be rolled back into T-bills. Instead, China and Japan would probably plow the returns, even if these turn out to be losses due to a weaker dollar, into commodities from America, such as wheat, cotton, rice and oil. Or they might invest the dollars in hard assets, such as land, mining companies and major energy concerns. These real-world activities of foreign-controlled assets will at least generate taxes for the federal and state governments.

Class Divide With a Twist

Dollar weakness will result in the loss of spending power by lower-income Americans, further reducing the consumer demand needed to drive the American economy.

Luxury goods such as iPhones, high-definition televisions or expensive sneakers will simply not be accessible to poorer families. Meanwhile, wealthy Americans will be able to diversify outside of the U.S. economy by investing in foreign currencies and emerging market funds.

The class gap would, therefore, widen in the United States, just as it has in Greece. The rich will become even richer and further alienated from the bulk of society, and the poor will become less mobile and more depressed.

The same process of widening class difference has been happening in Japan, with a slight twist. The suicide rate appears to be rising, primarily among men, who have lost their jobs or businesses and thus their self-confidence.

In a society with strict gun control, taking one's life is no mean feat -- requiring such methods as gas, jumping onto train tracks or diving off a cliff. Among the surviving mass of losers, frugality has become the trend in Japan.

It's bad taste to wear the latest Nikes or to own a new Gucci handbag. Patched clothing and recycled goods are the current fashion rage.

On Fridays, office workers still wine and dine, as if their frenzied drinking bouts were the Last Supper, but on a daily basis, everyone buys cheap bento box lunches from convenience stores. Eating alone in an upscale restaurant is a sign of social boorishness "when so many people are tightening their belts."

So the streets of Tokyo and Osaka are lined with "kon-wi-ni stores" (convenience stores with rows of vending machines) and cheap traditional pubs. Meanwhile, higher-end restaurants are doomed like dinosaurs.

It is difficult for those who have lived abroad and are in the habit of eating steak for lunch to comprehend how so many people can survive on so little food intake. After 19 years of economic downturn, there is no longer an obesity problem in Japan.

The other reactive trend is out-migration. Entire Japanese families are joining pensioners in the move to cheaper economies in Southeast Asia to get away from taxes and, now, radiation.

Those who choose to remain in country are something like the survivalists in the movie Terminator: Salvation: The machines of Fukushima are out of control and on a murderous rampage. Few dare to fight back against the lies and cover-ups, so most simply hunker down in their hideouts, waiting to die. On quieter days, when the streets of once-bustling Tokyo are dead silent, the nation doesn't seem just a collection of ghost towns. Japan is a ghost country.

For Americans plunging into the black hole of default and permanent indebtedness, Japan signals the clearest vision of what is to come.

Yoichi Shimatsu, a former editor of The Japan Times Weekly, is a Hong Kong-based environmental writer.