Just how messed-up will the U.S. be when Japan asks for its money back?

Just Imagine Massive Tokyo Quake, 23 Years Later: Michael Lewis

 

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excerpts from
Commentary by Michael Lewis

March 18 (Bloomberg) --

The single biggest financial question to arise from the imagined scenario was: Just how screwed will the U.S. be when Japan asks for its money back? It now has been joined by another: just how screwed will Japan be when it reveals that it not only wants but needs its money back?

 

That is what leaps out at you from the comparison of the real catastrophe with the imagined one: how different the context has become. Back in 1988, it was hard to imagine Japan working from anything but a position of strength: high savings rates, massive trade surpluses, a booming economy and stock market. There was no question then that Japan would bounce back. Today, Japan feels almost doomed.

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Catastrophe Insurance
A nation living with a perpetually high risk of natural catastrophe had in effect bought itself a massive catastrophe insurance policy. The unwitting seller of that policy had been us.
There was a lot more in both reports than that, and I won’t rehash it all here. But it’s interesting to compare what was imagined might happen 23 years ago with what actually is happening now.
The real and imagined Tokyo earthquakes are different events: The real earthquake, though more severe than the imagined one, dealt Tokyo only a glancing blow; the financial losses caused by the real quake so far don’t appear to be anything like $1 trillion; and back in 1988 no one considered the possibility of nuclear disaster.

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Basket Case
The ratio of Japan’s government debt to its gross domestic product (more than 225 percent) is the highest in the developed world, almost double that of the next-worst basket case: Greece. The Japanese government still owns about $900 billion of U.S. Treasuries, but less honestly. In effect, the Japanese government has borrowed huge sums from its own, increasingly strapped people and used some of that money to fund U.S. Treasury purchases.

 

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The Dallas-based hedge fund Hayman Advisors, which has been betting that Japan will eventually need to default or restructure, has estimated that a mere three percentage-point rise in interest rates would leave the government using all of its tax revenue simply to service its debt.
Even before the earthquake, Japan, to balance its books, was probably going to need to sell a lot of government bonds to foreigners. And those foreigners probably were going to demand a far higher rate of interest than Japanese government pension plans do to hold them. That rate of interest just went up.