Japan's the second-largest economy in the world. There's a rule in economics: "If something can't continue, then it won't." Japan can't continue down this path. All the trends are going against them.

Sadly, Japan's going to hit the wall, maybe some time in the next few years. This will be very bad for the world, as they have financed much of Asian growth. They do in fact buy a lot of world goods, and their buying power is going to fall. This is going to mean fewer US and European jobs. Not to mention fewer jobs in the countries that are Japan's neighbors.

And unless we change things in the US, this will be us in less than 10 years. I'm hopeful that we can actually get our act together. But then I'm an eternal optimist.

Buddy, Can You Spare $5 Trillion?

I've been writing for months that I don't think the US can find $2 trillion dollars this year and then come back to the well for another $1.5 trillion next year without serious disruption in the markets. Where do you find that much money when all the rest of the world also wants to borrow massive amounts? How much are we talking about? The friendly folks at Hayman actually spent the time to add it all up. The picture isn't pretty.

The graph shows the US will need to issue $3 trillion in debt. I  thought it was only 1.85. But the number has grown to almost $2 trillion (as I wrote it would). Then you need to add in off-budget items like TARP, state and municipal debt, and so on. Pretty soon it adds up to another trillion.

All told, Hayman estimates that the world will need to find $5.3 trillion in new government financing. Never mind the needs of corporations or individuals or commercial mortgages, and the like.

I'm still trying to get my head around this. Let's optimistically assume that they made a mistake and it's "only" $4 trillion. Where do you find that kind of money in a global deleveraging recession?

                                   
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The World Bank says that total world GDP in 2008 was $60 trillion. That means we need to find almost 9% of world GDP to fund the new government debt. Gentle reader, this is a serious problem. And now the next chart. Remove sharp objects or take another drink.

                                   
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This one takes into account the need for corporate borrowing, new corporate equity issuance, real estate debt, capital inflows and outflows, household savings, and so on.

Bottom line: There's simply not enough available capital under current conditions to do it all. Something has to give. More household savings? More foreign investment (flight to safety, as the rest of the world looks even worse)? Reduced corporate borrowing and thus less GDP growth? Higher rates to attract more foreign and US investment?

The combinations are infinite, but none of them bode well. Increased household savings means less consumer spending. To attract more foreign investment -- in the amounts that will be needed -- will mean higher rates. And this is 2009. What happens in 2010? And 2011?

One trillion dollars is 7% of US GDP. And we will be running trillion-dollar deficits for a very long time.

Just a thought: Do you want to be a senator or congressman running for office next year with unemployment nearing 11% (my estimate), with all of the problems mentioned above, and with a record of having voted for the largest unfunded deficits in history? It's going to be a very interesting election cycle.