A Nuttycellist's Monologue: Financial crisis

Our government has created a supplementary budget up to 21 trillion JPY, that is, about 130 billion USD. The total budget this year rose more than 136 trillion JPY, that is, approximately 860 billion USD. This size of budget is the largest ever. It is for fiscal stimulus, as they say. Increased military spending is most conspicuous. Almost doubled from that a few years ago. The budget for social security or farming is increased slightest. Considering of the on going inflation, this means almost reduction for these expenditures.

They say the revenue has been increased a bit. But it is mostly due to the inflation. It is just nominal but not substantial. Not as much as the expenditure. The government doesn't have any other means than issuing national bond to cover the increase of expenditure, I am afraid. The bond already issued is amounted more than 1000 trillion JPY. About 150 trillion JPY bonds are refinanced every year. The bonds yield rates, mainly of long term ones, are increasing to the extent they have never experienced. Higher interest rates would deteriorate the finance of Bank of Japan, which results in weakening of our currency as well as increase the expenditure of bond interests of the government.

I am afraid the scenario we could picture in the near future could never be so hopeful. More than 70% of the people are applauding the present government. I wonder if they are aware of this financial crisis or if they are too stupid to acknowledge of the present situation.

The most pessimistic scenario we could draw is as follows;

THE GLOBAL FINANCIAL SYSTEM JUST BROKE IN TOKYO

Japan’s 30-year bond yield hit 3.41% today. That number means nothing to you. Here’s why it should terrify you.

Japan owes 230% of everything it produces. It’s the most indebted nation in human history. For 35 years, they kept the lights on by borrowing at near-zero rates. That era ended this morning.

Here’s What Just Happened

Core inflation is running at 3.0%. Government bond yields are spiking to levels not seen since 1999. China just conducted its 25th military incursion near Japanese waters this year. Japan is now forced to spend 2% of GDP on defense … nearly 9 trillion yen annually.

The Bank of Japan is trapped between two impossible choices: raise rates and trigger a debt collapse, or keep rates low and watch inflation destroy savings. They chose door number two.

Why You Should Care

Every major bank, hedge fund, and institution on Earth has borrowed yen at cheap rates and invested it elsewhere for 30 years. This “carry trade” could be worth anywhere from $350 billion to $4 trillion. Nobody knows the real number because it’s hidden in derivatives.

When Japan’s system breaks, this money unwinds. Fast.

The last time we saw a preview … July 2024 … the Nikkei dropped 12.4% in a single day. The Nasdaq fell 13%. That was a small tremor. The earthquake is coming.

The Math Is Simple!

Japan’s government pays interest on $9 trillion in debt. Every 0.5% increase in rates costs them $45 billion annually. At current yields, debt service will consume 10% of all tax revenue. That’s the death spiral threshold.

The yen is trading at 157 to the dollar. If it strengthens to 152, the entire carry trade becomes unprofitable. Unwinding begins. Emerging market currencies could drop 10-15%. The Nasdaq could fall 12-20% as funds are forced to sell.

What Happens Next

December 18-19, the Bank of Japan meets. Markets are pricing 51% odds they raise rates another 0.25%. If they do, volatility explodes. If they don’t, inflation accelerates and the problem gets worse.

There is no way out. Japan’s fiscal dominance is now permanent. They must keep the yen weak to service their debt. This means the free money that powered global markets since 1990 is ending.

The Bottom Line

Interest rates worldwide are going up 0.5-1.0% permanently. Not because of inflation. Because the world’s largest creditor nation can no longer subsidize global growth.

Your mortgage, your car loan, your credit card … all repricing higher. Stock valuations built on cheap money … all compressing. The everything bubble … all deflating.

This is not a recession. This is a regime change. The largest liquidity engine in financial history just seized up, and most people won’t understand what happened until their portfolios are down 30%.

Tokyo broke the world today. You’ll feel it tomorrow.