The media have given London a new nickname: Reykjavik-on-Thames. Britain’s economy revolved around banking. British banks hold about $4.4trn in foreign debt. The total size of the UK economy is $2.1trn. This year, the British government nationalised major parts of the UK’s banking system. In total, the UK Treasury is on the hook for over $2trn in potential liabilities, according to an estimate by the Office of National Statistics.
But Britain is not going to be the world’s biggest national bankruptcy. The government debt of the United Kingdom is only around $950bn… or about $15,000 per capita.
This week, the United States Treasury sunk another $30bn into AIG… its fourth bailout. It also put another $25bn into Citigroup. The Treasury is now on the hook for as much as $6trn in liabilities. Last week, the White House produced its new budget. President Obama wants to run a deficit of $1.75trn in 2009.
The Treasury will pay for these bailouts by borrowing money. The Treasury borrows money by issuing Treasury bonds. Recently, for example, it auctioned three-year, ten-year, and 30-year bonds. This auction should raise around $60bn.
The ‘debt clock’ measures the amount of money the government owes its creditors. Today, the US debt clock reads almost $11trn. To pay off this debt tomorrow, the government would have to collect nearly $36,000 from every American.
But America is not about to be the world’s biggest bankruptcy.
Of the major industrial economies in the world, Japan’s government is the most indebted.
Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan’s mantra is ‘growth without cost’. As a result, the Japanese government has built up the world’s most crippling debt load.
The government of Japan owes $7.8trn. That’s $157,000 per capita.
We’ve been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The US has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.
If there’s going to be a major sovereign bankruptcy, it’s going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports… but even that’s drying up now. In January, Japan’s exports plunged 47%, producing a trade deficit. People talk about Japan as a ‘nation of savers’. But that’s not true anymore. Japan’s personal savings rate collapsed from 16% in the early 1990s to 2.2% last year.
Japan has an aging population and no immigration. I can’t see where it’s going to find the money to pay off its huge pile of debt.
The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world’s most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world’s best performing currency…. Rising 33% against the Canadian dollar, 40% against sterling, and 19% against the US dollar.
Back in January, I told you a fall in the yen was all but inevitable. The yen is down 12% since that article. But according to a Merrill Lynch report I saw yesterday, large speculators still have a $3.7bn long position in yen futures. The analyst described it as “crowded.”
The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started… and it will end in the bankruptcy of Japan’s government. FXY is the ETF for the Japanese yen. When then yen falls, this fund falls, too. The easiest way to bet on a fall in yen is to short this fund or buy put options on it.
• This article was written by Tom Dyson, co-editor of the free daily investment newsletter
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