David Stockman On The $1.3 Trillion Elephant In The Room

  How do you fix a problem 50 years in the making?

  The short answer is: "You don't!" So politicians will keep adding oil to the fire until the economic machine blows. There are no other options. It's the only thing they know how to do and the only thing electors will vote for. Anything else is complex, requires sacrifices and compromises. "Out of the question!" is an understatement so explode the machine will!

  David Stockman is a voice of reason in an unreasonable world. It is safe to bet that absolutely nobody will listen to him in Washington!

Authored by David Stockman via InternationalMan.com,

These people have to be stopped!

We are talking about the nation’s unhinged monetary politburo domiciled in the Eccles Building, of course. It is bad enough that their relentless inflation of financial assets has showered the 1% with untold trillions of windfall gains, but their ultimate crime is that they lured the nation’s elected politician into a veritable fiscal trance. Consequently, future generations will be lugging the service costs on insuperable public debts for years to come.

For more than two decades these foolish PhDs and monetary apparatchiks drove the entire Treasury yield curve to rock bottom, even as public debt erupted skyward. In this context, the single biggest chunk of the Treasury debt lies in the 90-day T-bill sector, but between December 2007 and June 2023 the inflation-adjusted yield on this workhorse debt security was negative 95% of the time.

That’s right. During that 187-month span, the interest rate exceeded the running (LTM) inflation rate during only nine months, as depicted by the purple area picking above the zero bound in the chart, and even then by just a tad. All the rest of the time, Uncle Sam was happily taxing the inflationary rise in nominal incomes, even as his debt service payments were dramatically lagging the 78% rise of CPI during that period.

Inflation-Adjusted Yield On 90-Day T-bills, 2007 to 2022

The above was the fiscal equivalent of Novocain. It enabled the elected politicians to merrily jig up and down Pennsylvania Avenue and stroll the K-Street corridors dispensing bountiful goodies left and right, while experiencing nary a moment of pain from the massive debt burden they were piling on the main street economy.

Accordingly, during the quarter-century between Q4 1997 and Q1 2022 the public debt soared from $5.5 trillion to $30.4 trillion or by 453%. In any rational world a commensurate rise in Federal interest expense would have surely awakened at least some of the revilers.

But not in Fed World. As it happened, Uncle Sam’s interest expense only increased by 73%, rising from $368 billion to $635 billion per year during the same period.  By contrast, had interest rates remained at the not unreasonable levels posted in late 1997, the interest expense level by Q1 2022, when the Fed finally awakened to the inflationary monster it had fostered, would have been $2.03 trillion per annum.

In short, the Fed reckless and relentless repression of interest rates during that quarter century fostered an elephant in the room that was one for the ages. Annualized Federal interest expense was fully $1.3 trillion lower than would have been the case at the yield curve in place in Q4 1997.

Alas, the missing interest expense amounted to the equivalent of the entire social security budget!

So, we’d guess the politicians might have been aroused from their slumber had interest expense reflected market rates. Instead, they were actually getting dreadfully wrong price signals and the present fiscal catastrophe is the consequence.

Index Of Public Debt Versus Federal Interest Expense, Q4 1997-Q1 2022

Needless to say, the US economy was not wallowing in failure or under-performance at the rates which prevailed in 1997. In fact, during that year real GDP growth was +4.5%, inflation posted at just 1.7%, real median family income rose by 3.2%, job growth was 2.8% and the real interest rates on the 10-year UST was +4.0%.

In short, 1997 generated one of the strongest macroeconomic performances in recent decades—even with inflation-adjusted yields on the 10-year UST of +4.0%. So there was no compelling reason for a massive compression of interest rates, but that is exactly what the Fed engineered over the next two decades. As shown in the graph below, rates were systematically pushed lower by 300 to 500 basis points across the curve by the bottom in 2020-2021.

Current yields are higher by 300 to 400 basis points from this recent bottom, but here’s the thing: They are only back to nominal levels prevalent at the beginning of the period in 1997, even as inflation is running at 3-4% Y/Y increases, or double the levels of 1997.

US Treasury Yields, 1997 to 2024

Unfortunately, even as the Fed has tepidly moved toward normalization of yields as shown in the graph above, Wall Street is bringing unrelenting pressure for a new round of rates cuts, which would result in yet another spree of the deep interest rate repression and distortion that has fueled Washington’s fiscal binge since the turn of the century.

As it is, the public debt is already growing at an accelerating clip, even before the US economy succumbs to the recession that is now gathering force. And we do mean accelerating. The public debt has recently been increasing by $1 trillion every 100 days. That’s $10 billion per day, $416 million per hour.

In fact, Uncle Sam’s debt has risen by $470 billion in the first two months of this year to $34.5 trillion and is on pace to surpass $35 trillion in a little over a month, $37 trillion well before year’s end, and $40 trillion some time in 2025. That’s about two years ahead of the current CBO (Congressional Budget Office) forecast.

On the current path, moreover, the public debt will reach $60 trillion by the end of the 10-year budget window. But even that depends upon the CBO’s latest iteration of Rosy Scenario, which envisions no recession ever again, just 2% inflation as far as the eye can see and real interest rates of barely 1%. And that’s to say nothing of the trillions in phony spending cuts and out-year tax increases that are built into the CBO baseline but which Congress will never actually allow to materialize.

What is worse, even with partial normalization of rates, a veritable tsunami of Federal interest expense is now gathering steam. That is because the ultra-low yields of 2007 to 2022 are now rolling over into the current market rates shown above—at the same time that the amount of public debt outstanding is heading skyward. As a result, the annualized run rate of Federal interest expense hit $1.1 trillion in February and is heading for $1.6 trillion by the end of the current fiscal year in September.

Finally, even as the run-rate of interest expense has been soaring, the bureaucrats at the US Treasury have been drastically shortening the maturity of the outstanding debt, as it rolls over. Accordingly, more than $21 trillion of Treasury paper has been refinanced in the under one-year T-bill market, thereby lowering the weighted-average maturity of the public debt to less than five- years.

The apparent bet is that the Fed will be cutting rates soon. As is becoming more apparent by the day, however, that’s just not in the cards: No matter how you slice it, the running level of inflation has remained exceedingly sticky and shows no signs of dropping below its current 3-4% range any time soon.

What is also becoming more apparent by the day is that the money-printers at the Fed have led Washington into a massive fiscal calamity. It is only a matter of time, therefore, until the brown stuff hits the fan like never before.

Europe Scraps Net Zero, Biden Should But Won't, Why?

  Net Zero is nonsense but worse than that, it's a suicide pact.

  The real problem is that while we're chasing chimeras, time is running out and investment is "real" energy like gas or nuclear is not being done. This matters because energy can only be long term. It takes a decade to build a plant and three to implement a new energy policy. So whatever you decide now will impact you in 10 to 20 years. Without energy you can't run a modern economy. Likewise, with green energy which is little more than a fad for rich people. This is not an opinion. With trillions of dollars and Euros of investment, green energies (which are often NOT green at all), have hardly moved the needle growing from 3 to 5% of our energy needs. At this speed, we'll be bankrupt much sooner than we have new, efficient energy sources.  

Authored by Mike Shedlock via MishTalk.com,

“Unaffordable climate commitments have two leftist British parties racing to exit stage left.”

Europeans Ditch Net Zero

The Wall Street Journal reports Europeans Ditch Net Zero, While Biden Clings to It

You know you’ve stumbled through the looking glass when European politicians start sounding saner on climate policy than the Americans do. Well here we are, Alice: Europeans are admitting the folly of net zero quicker than their American peers.

The latest example—perhaps “victim” is more apt—is Humza Yousaf, who resigned this week as Scotland’s first minister. That region within the U.K. enjoys substantial devolved powers over its own affairs, including on climate policy. An administration led by Mr. Yousaf’s left-leaning Scottish National Party had hoped to rush ahead of the national government in London in slashing carbon emissions.

Until, that is, someone noticed the costs. A recent report from the U.K.’s Climate Change Committee noted Scotland had fallen far behind on its climate goals. The government aimed to reduce by 20% the aggregate distance driven by Scottish motorists, compared with 2019 levels, but had no plan to accomplish the reduction in personal mobility by the 2030 deadline. To get back on track with the government’s goal of a transition to home electric heat pumps, Scotland would have to replace natural-gas fire boilers at a rate of more than 80,000 households a year by the end of the decade. That’s a big ask considering that in 2023 it managed 6,000 boiler replacements. The government resisted imposing an aviation tax to discourage excess flying. And so on.

Mr. Yousaf did the only thing he could under the circumstances: He all but abandoned net zero. His administration announced it is ditching firm annual emission-reduction targets in favor of fuzzier “carbon budgets.” The Green Party, with which Mr. Yousaf’s SNP governed in a coalition, balked. After a series of political machinations that were one part “Macbeth” and two parts “Comedy of Errors,” Mr. Yousaf’s administration collapsed and he was forced to resign.

Observe two salient details. First, the specific list of targets the country was missing. Scotland had reached the point where further net-zero progress would have made obvious and material demands of household budgets. That isn’t counting the additional costs of renewable power hidden in utility bills.

I have discussed the above ideas many times. There are farm protests in nearly every country on the main continent and Greens are likely to get clobbered hard in the European Parliament elections in June.

What About the US?

The Journal reports “The puzzlement is that the U.S. is headed in the opposite direction. President Biden is pressing ahead with aggressive net-zero policies such as an electric-vehicle mandate and pouring trillions of dollars of borrowed government and hard-earned household money into climate boondoggles.“

There is no puzzle. Biden is owned 100% by the Progressives.

They control climate policy, regulations, student loans, abortion, everything.

Please note Biden Promotes Climate Change at the Expense of More Global Poverty

The mad rush to deal with climate change, even if it works (it won’t), has a nasty tradeoff (more global poverty).

Biden will not do anything to offend the Progressives, even if it means he loses the election over it.

GPT-5 Launch Day is NEAR | The End of Privacy and "Digital People" (Video - 14mn)

  We are only days away from the release of GPT5 and it looks like it's going to be a game changer in some positive and possible many negative ways. 

  GPT4 was dumb in many ways but also extremely "intelligent" as an extension to your intelligence, meaning that it did know what you didn't and with the right prompt could understand what you were after. That and only that: Perfect.

  GPT5 is going to be very different, with many add-ons which may completely change the experience. Most people will see this as "progress" at least at the beginning but I am not sure at all! 

 The ability to take more "context" into consideration will make it closer to AGI. Good. Although, now it's going to take the past into consideration. How dangerous can this be? Could it be the beginning of the really never forgetting internet, in which case we truly do have a problem? Whatever you have done, wherever you have been, whoever you have met will now catch up with you retrospectively. No problem? Think again: Now thanks to AI we can make inferences. The machine will quickly "know" you better than you do. This is the key to "pre-crime" or more insidiously manipulation on a massive scale, individually. 

 With AI, any picture can retroactively be geo-localised. Persons identified. Past mails, letters, videos, pictures analyzed and understood in their context. How long before the AI creates a perfect "image" of you through time? What can be done with that?

 And that's just the past. What about the present? How long before you are recognized instantly on EVERY camera linked to AI? How much privacy will you have left if almost anybody can know where you are at any time? Remember Jason Bourne 20 years ago? The CIA using advanced computers could never quite figure where he was in real time. Now the AI will know where you are before you arrive where you want to be! If you are not yet frightened, you are not paying attention.  

 In the past, laws have always been voted with "good" or at least valid intentions in mind and soon after used for a completely different purpose. Here we'll get the problem on steroid. New laws about hate crime and misinformation in Europe and the US are already quite dangerous in themselves but with AI extensions, any malevolent government will soon be in a position to do things that the worst dictators could not have dreamed about. How much freedom can there be in such a world?  The more you think about it, the more the danger of the technology becomes obvious. We're on our way to giving birth to a monster!

Are We Destroying The Economy On Purpose?

  An interesting and different look at the market. The FED is stuck as is the bank of Japan. They can't meaningfully raise rates less the engine explodes and banks implode nor can they lower rates less they loose credibility and inflation goes through the roof. Interesting months ahead, but one thing is certain: We could tell right from the beginning that it would end this way. It always does.

Submitted by QTR's Fringe Finance

In one of the most fascinating discussions I’ve had in a while, I spoke last weekend with my friend Andy Schectman about the state of the world, markets, geopolitics and the economy.

What started as a friendly catch-up quickly turned into delving into angles on the state of our nation that I had never before considered — specifically, Andy laying out one theory that started in the 1960’s that could explain the chaos that it appears our economy — and nation — is devolving into.

First, we talked about the bond market, excessive fiscal spending and why gold continues to be the answer. Andy told me: "I think it's a lot deeper than that, too. I think that we have proven to the rest of the world, largely through weaponizing of the dollar, that if you don't align ideologically with us, well, that's even a bigger problem. So, yeah, when you look at what gold has done over the past 25 years, it's outpaced the bond market, but it doesn't have the counterparty risk.”

“And I think that's really the big problem here,” he continued, explaining why he thinks the bond market will eventually lose its footing. “It's counterparty risk on top of brain-dead monetary policy and as irresponsible a fiscal policy as you could ever imagine. So, yes, I do think it is. And I don't know if 5% is the line in the sand. I mean, it just seems as though, according to Jim Willey, we can hand money to Ireland and the Caymans and the United Kingdom under the table to continue to, you know, continue the facade, if you will. as to who would be stupid enough to buy any treasuries of maturity, any U.S. bonds of length of maturity, 10-year or greater, who in their right mind would do that?"

Speaking about the Fed potentially cutting rates, Andy said: “Look, I think by cutting, we've lost all credibility at that point, complete and total credibility. And I don't think there is any way that they can lower rates. I really don't think that there is.”

“And I think there's nothing but inflation and higher rates ahead of us. But if I had to guess, it will be range bound, you know, just like there was no inflation and then it was transitory and then it was structural, then it was gone, then it was back. It'll be the same thing here,” he added.

As an example: “Well, the economy is a, you know, the economy is a little bit hotter than it was supposed to be. And also we're not going to be higher for longer. And, you know, but we're thinking of lowering and maybe we'll do two rate cuts by the end of the day. Okay. Maybe one, well, maybe we're not going to do it. They're not going to do shit. And I don't think they really can do much of anything.”

Andy says: “You know, they can't really raise rates because we have to sell $14 trillion in bonds this year to retire the maturing debt and also pay the current bills. And a lot of this debt's going to cost far more than the debt it's replacing, which could lead to even more printing to cover that cost. So you can't really raise rates.”

Andy then told me about a theory that changed the way I thought about the economy...(READ THIS FULL INTERVIEW AND LISTEN TO THE PODCAST HERE).

Inside China's Failed $100 Billion GHOST CITY in Malaysia (Video - 29mn)

  You only need to watch the first 10mn to understand what's going on here.

  China Country Garden (famous for it's 2023 bankruptcy) invested in a huge project close to Singapore. Expensive apartments and villas to attract rich Chinese abroad. Two problems: The rich Chinese didn't want to go in the Middle of Nowhere and more importantly, the Chinese government in the end, recently restricted how much they could invest overseas to the equivalent of USD 50,000 which is a fraction of the cost of an apartment or a villa. 

 The project is therefore stopped. The prices are beyond the ability of Malay people to pay and without Chinese individual investors, the prospects are grim.

 I have never visited the place, but flying out of Singapore a few years ago you could see the huge earthwork on-going on what was mostly mangroves at the time. Out of the total 100 billion, it looks like about a third as already been invested. But without clients nor new funding, it is difficult to imagine what this city will become, knowing that in the harsh tropical environment of Malaysia, properties tend to degrade fast. 

 Another nail in the coffin of the current, giant world bubble? This project must concern mainly Chinese banks but also to some extent Malaysian banks. Still, at some stage, someone, somewhere will have to absorb the loss...

 

Israel is Destroying America (Video - 16mn)

  It is now time to take a stand: Netanyahu is a dangerous man who represents a danger for Israel and the world. He must be removed!

 

Is Netanyahu a war criminal? This Is What They’re NOT Telling You by Russell Brand (Video - 11mn)

  Who indeed are the real criminals? When the empire makers are accusing you to be a war criminal, isn't it a travesty of justice? (The first 5mn cover the issue.)

Central Bank Digital Currency CBDC is Coming (Video - 32mn)

  It is unfortunate that Ed Dowd is so difficult to follow because what he is saying is very interesting. Banks insolvency in the US may indeed precipitate the adoption of CBDC. Hopefully people will resist but what if the shock is big enough?  

 

Will Trump Survive This?

  As most foreigners, I find it difficult to chose between two geriatric candidates. The problem is that both have been president so we know their policies. Trump is more theatrical but he will support Israel with the risk of a conflict with Iran, even if he could slightly lower tensions in Ukraine. 

 As for the economy, we are heading into a recession. The only question left is before or after the election. The Deep State will do its very best to delay, knowing that a recession will endanger Biden but do they have this power? The currency market is showing signs of cracks and it's by far the largest... 

  But in the long term, the concern in the US is not the market but the rule of law. And in that respect, what we are seeing is extremely concerning. The DOJ and the administration are truly out of control. Freedom is under attack from almost every angle. And unfortunately if the US falls then the rest of the West will follow suit.

  Will 2024 turn out as the most important year in our lives? It very much could.

Authored by James Rickards via the Daily Reckoning,

This is a highly consequential election year, to say the least. The policy differences between Biden and Trump are enormous. Whether it’s taxes, regulation, borders, energy or foreign policy, the differences couldn’t be clearer.

And though I prefer to focus my analysis on markets alone, I can’t. These days especially, politics plays too great a role in how markets behave.

But this year’s election is about far more than policy.

In the past, the D.C. establishment could live with a typical Republican or Democrat. They knew neither candidate would rock the boat too much if he got elected. Both candidates were cut from the same basic cloth and played by the accepted rules.

But all that goes out the window with Trump.

He’s the most polarizing political figure we’ve seen in our lifetimes. You’d probably have to go back to Andrew Jackson to find a parallel.

And it’s clear that Trump’s political enemies will stop at nothing to keep him out of the White House this time.

Lawfare 

“Lawfare” is their primary tactic. They just want to get Trump convicted of a felony before the election so they can brand him a criminal, believing that the American public won’t elect a convicted felon.

They don’t care if the conviction is subsequently overturned by a higher court. The damage will already be done. And if it trashes the Constitution, Trump’s political enemies are prepared to live with that.

They’re convinced that Trump is the equivalent of Hitler and that he’ll destroy democracy if he’s elected. So in their minds, the ends justify the means. They’ll justify any action, legal or illegal, to ensure his defeat.

They don’t seem to realize that the harder they go after Trump with bogus charges, the more popular he becomes.

I’m not here to defend Trump or oppose him. No doubt, he’s a deeply flawed character with personality traits that alienate many people. But voters don’t expect a billionaire real estate magnate from New York City to be a saint. They vote for him because they think he can get things done.

And under honest democratic elections, the administrative state, or deep state, whatever you want to call it, stays out of it. But that’s not the system we have today.

And that should concern every American, regardless of his or her political affiliation.

Again, it doesn’t matter if you love Trump or hate him. But in a democracy, the people rule. Not the bureaucrats. And if the people elect Trump, then he should be allowed to enact the policies that got him elected. That didn’t happen when he won in 2016.

Stop Trump!

The first two years of his administration were hobbled by the fake Russian collusion hoax and the numerous investigations that resulted. Those investigations showed that there was no collusion between Trump and Russia, but Trump’s enemies didn’t care (and certainly did not apologize).

They just moved on to the next fake scandal, which was the first impeachment over a brief phone call to Ukrainian President Zelenskyy asking about Biden family corruption. It turns out that Biden family corruption was rampant in Ukraine, but that didn’t stop phony “whistleblowers” (actually lawbreakers) like Eric Ciaramella from leaking classified transcripts to Adam Schiff to get the impeachment process going.

Trump was acquitted by the Senate. Then came the second impeachment where Trump was also acquitted. Since leaving office, Trump has been hit with federal criminal charges relating to Jan. 6 and the Mar-a-Lago raid, as well as state criminal charges in New York and Georgia.

Trump’s enemies never quit. They’re also going after Trump’s advisers and confidants. It’s meant to isolate Trump because anyone who advises him will fear they’ll be hauled into court on some bogus charge and have to spend a fortune on lawyers, win or lose.

The latest lawfare tactic has been unveiled against Trump attorney John Eastman. It’s called “debanking.”

Good Luck Living Without a Bank

In Eastman’s case, it started with Bank of America closing his bank accounts for no good reason and with no recourse. Then he turned to his accounts at USAA, which specializes in accounts for military veterans and their families. Shortly thereafter, USAA also closed Eastman’s bank accounts.

We tend to take banking services for granted and don’t think much about what would happen if we were shut out of the banking system. No checks, no savings accounts, no wire transfers, no ATMs, no bank-issued credit cards, no lines of credit or mortgages, etc.

It’s like trying to survive without food or water. It’s impossible. And that’s the whole point. It’s designed to make the victim’s life miserable.

The same thing happened in the U.K. when NatWest and Coutts debanked Nigel Farage, leader of the Brexit movement. Farage fought back and the CEO of NatWest was eventually fired over the incident. But it was a brutal fight and a tough transition for Farage when he suddenly found himself debanked.

Unfortunately, debanking is just an extension of the “woke” cancel culture that’s taken root in much of the West.

Shut up, Bigot!

When we look around at places like New Zealand and Scotland, there seems to be a bizarre competition to see which country can pass the most fascist laws and imitate George Orwell’s dystopia in Nineteen Eighty-Four in the least amount of time.

Scotland has imposed so-called hate crime laws that subject you to imprisonment for exercising free speech if it happens to offend a long list of protected parties. No actual violence or physical act is needed. If you simply say the wrong thing, you can be arrested, fined and imprisoned for “inciting hate.”

A similar law has just passed in Ireland. The Polish government wants to pass a law that makes it a crime to “defame” members of the LBGT community. Of course, the term “defame” is ill-defined and is in the eye of the beholder. Any choice of words, even if derogatory or hurtful by some standard, should be protected by free speech provisions. But in Poland, it may soon land you in jail.

I’ve never understood hate crime laws anyway (and I’m a lawyer). If you murder someone, it’s murder. If you assault someone, it’s assault. Subject to due process of law, you should go to jail if convicted or perhaps face capital punishment.

Prosecutors have to show intent, but what does “hate” have to do with it? The perpetrator may, in fact, hate the victim but that’s not the crime. The crime is assault or murder. Those crimes have been considered crimes for millennia.

Nineteen Eighty-Four Was Supposed to Be Fiction

Adding hate to the definition just blurs the line between thought and action in ways that make it easier for fascist governments to target political enemies with flimsy allegations of “hate” when no actions were involved.

The most egregious example of this trend toward thought crimes is Canada. The chief neo-fascist there is Prime Minister Justin Trudeau. He has proposed a law called the Online Harms Act that expands the definition of “discrimination” to include online speech “likely to foment detestation or vilification of an individual or group.”

What exactly does this law mean by “foment”? Who defines “vilification” or “detestation”? What’s the definition of “group”?

All of these questions will be answered by a new Digital Safety Commission, which will not be bound by “any technical or legal rules of evidence.” If accused, you can be ordered to pay $20,000 to any “victim” and $50,000 to the state with no limit on how many victims might crawl out of the woodwork.

This is practically an invitation for grifters and activists to attack political enemies with fake claims of having been subject to “detestation.” It gets worse. If a court believes you are likely to commit a “hate crime” under this law, you can be placed under house arrest and held in isolation.

In other words, just thinking the wrong thing as imagined by an unaccountable magistrate is enough to put you under house arrest. This is actually worse than what the Thought Police did in Orwell’s novel.

You can expect censorship in the U.S. to increase as we get closer to the November election. Get ready for it.

Nineteen Eighty-Four was supposed to be fiction. Unfortunately, it’s becoming reality.

Japan's Warning For America

 Just on cue, the markets are starting to break in early May. This indicator more than anything else is telling you that something is about to happen...

Authored by Michael Wilkerson via The Epoch Times,

Last week, Japan saw its currency, the yen, rapidly depreciate against the U.S. dollar and other world currencies to near record low levels. This drew the attention of financial markets and other observers, and—in some quarters—led to panic. There was concern that Japan, a formerly great nation now increasingly viewed as the “sick man of Asia,” was on the brink of a currency and financial markets crisis.

It wasn’t so long ago that Japan was the envy of the world. Japan’s postwar recovery and subsequent economic miracle produced by the 1980s the world’s second-largest economy after the United States. Numerous Japanese multinational corporations were admired by the business world as a result of their growth, efficiency, and managerial discipline. The state and big business were closely aligned in what appeared an unstoppable formula. Flush with cash and confidence, Japanese companies and investors were aggressively expansionist, acquiring market share, trophy properties, resources, and businesses in the United States and elsewhere. Much like concerns about China today, fears then abounded that Japan would overtake the United States as the global economic leader.

These fears were unfounded. “Japan Inc.” was a house built on a faulty foundation. Overly accommodative easy money, along with high leverage throughout the financial and corporate sectors, facilitated a massive stock market and real estate bubble, which eventually burst in 1990. The crash led to a depression from which Japan has never recovered, even after three decades. The question is, why not? Herein lies a lesson for the United States.

Repeated government bailouts of failing financial and industrial companies have perpetuated Japan’s crisis. Japan’s leaders and policies have repeatedly blocked the process of creative destruction, which—if allowed to run its course and cleanse the system—would have been a massive stimulus to entrepreneurship and economic vitality. However, rather than allow capitalism to work, the Japanese system doomed the country to a generation of stagnation.

As a result, Japan has endured three “lost decades” of weak economic growth, diminished purchasing power, lower and lower standards of living, loss of prestige and influence in the global community, and an aging population that the island nation’s resources are straining to support.

Japan now has the world’s highest government debt-to-GDP ratio, at 264 percent. Japan’s banks are walking zombies, unable to grow or lend because they have never restructured their balance sheets to clean up massive piles of debt left over from excesses of previous decades. The Bank of Japan (BOJ) holds government bonds and other assets equal to 127 percent of Japan’s GDP, the highest ratio of any central bank in the world. This portfolio resulted in over $70 billion in unrealized losses for the BOJ in six months of 2023 alone.

The Japanese yen has devalued against the U.S. dollar by more than 30 percent in just three years since 2021. Since the global financial crisis 2008–09, the yen has lost 75 percent of its value against gold. Because of Japan’s high reliance on imports, this loss of purchasing power has translated directly into a substantially lower standard of living for the Japanese people. In theory, Japan could support the yen by raising interest rates, but this is a political, monetary, and fiscal impossibility.

Decades of easy money policies are a central culprit and cause of this slow-moving trainwreck.

The Bank of Japan only began raising interest rates this March, some three years after the United States and the European Union brought their own easy money policies to an end. This was the first time the BOJ has raised rates since 2007, a move that pulled the official rate out of negative territory. Nonetheless, with inflation now approaching 2 percent, a short-term policy rate of zero to 0.1 percent means that real rates remain around negative 2 percent. This serves as an additional tax on Japanese households and an intended stimulus to spend today rather than save for tomorrow.

Money essentially is free in Japan, but no one can afford to borrow it, even if the banks can manage to lend it. The BOJ and the entire banking system stand in the penumbra of insolvency. Only Japan’s decade-long zero interest-rate policy has allowed Japan’s decrepit financial system to continue to stand following the 2008 financial crisis and the effects of COVID economic shutdowns. Japan cannot afford to raise interest rates to support its currency more than nominally above the zero bound without substantially raising debt service costs and exploding losses. This would bring the entire rickety system to the ground.

A growing economy might help ease the burden, but Japan’s economy is moribund. This is not surprising, as meaningful growth is impossible under mountains of debt. GDP shrank by 0.8 percent in the third quarter and eked out 0.1 percent growth in the fourth quarter. While the country thus barely escaped technical recession (two consecutive quarters of GDP decline), Japan hasn’t posted GDP growth above 2 percent in more than 20 years, save for two rebound quarters after the global shocks of the financial crisis and COVID.

Japan represents a slow-moving demographic disaster. Japan has the oldest median population of any major country in the world and the lowest fertility rate at 1.37. Japan’s fertility rate has been below the minimum population replacement rate (2.1) for 40 years, meaning that the country is both aging and losing economic productivity, and it is probably too late to reverse it.

This all represents a grave warning to the United States.

The U.S. government is chasing Japan for the ignoble title of most indebted nation. Overly indebted nations cannot grow. With federal government debt to GDP of 129 percent, a ratio which is increasing rapidly, the United States is now the fourth most indebted country in the world. Debt is growing more quickly now because the federal government refuses to wean itself off of deficit spending, including an additional $1.7 trillion in 2023, which must be funded by new debt, as must over $1 trillion in interest expense. This debt—and the cost to service it—acts as a drag on our economy. Deficit spending and the borrowing required to support it crowds out private market investment and financings.

Rather than let more insolvent banks and unprofitable firms fail, U.S. monetary policy since at least the 2008 financial crisis has propped up bad business models—and the asset values of otherwise worthless investments—by subsidizing the cost of capital well below the natural rate of interest. In a nation that has been the standard bearer and exporter of capitalism for more than two centuries, socialistic government policies are preventing capitalism from working at home. This will eventually catch up with our financial markets and economy, just as it did for Japan.

It is not just shortsighted monetary and financial policy that threatens U.S. competitiveness.

If Americans’ worsening attitudes toward the importance of marriage and children do not reverse course dramatically, the United States will face the same demographic fate as Japan. The fertility rate in the United States has been in decline since at least 2008, and reached a record low of 1.62 in 2023. This is well below the replacement rate, and thus unsustainable.

Progressives point to declining fertility rates and aging populations to justify mass illegal immigration, but this is a red herring. Bringing tens of millions of unskilled, uneducated, and culturally unassimilated migrants into the nation is not a benefit but rather an untenable burden on social infrastructure, an enervating drain on economic productivity, and an unbearable tax on legal citizens.

At least Japan got that part right.