Lessons From Japan: Debt Levels Too High To Ignore

Includes: GLD, PHYS, PSLV, SLV
by: Parsimony Investment Research

Much has been written about Japan’s so-called "lost decade". Many market forecasters and economists believe that the U.S. is headed down the path of our own lost decade. Despite the fact that Japan continues to enjoy a high standard of living and societal strife has been limited, we believe that many people feel a false sense of security with a slow, grinding Japan-like scenario.

Many investors assume that normalized growth in the U.S. will return soon. We believe that this is a shortsighted and somewhat dangerous viewpoint. Fundamentals are still very poor in the U.S. and similarities with Japan should not be ignored.

Due to a stagnant economy, a number of troubling things have happened to Japan over the past 20 years.

  • Net government debt has increased to 131 percent of GDP from 12 of GDP (a nearly 11x increase);
  • The proportion of elderly in the population has increased from 12 percent to 23 percent (i.e., with the passage of time the country is aging);
  • Stagnation has led to frequently changing government policies that do not provide the stability and clarity firms need to hire and invest for the future.

click to enlarge images

The Japanese economy underwent profound change over the last 20 years as depicted in the charts above. We believe over the next few years the market will force Japanese interest rates higher which will reinforce more economic pain. Due to its significant debt burden the Japanese economy cannot afford higher rates.

Due to its significant debt burden, we believe that ultimately the Bank of Japan (and the U.S. Federal Reserve) will be forced to print more and more currency. We live in a world where the developed economies have simply borrowed too much money. Due to the social cost of austerity, we are afraid that inflationary policy will eventually win the day. In 2011, gross debt per capita is expected to reach $110,000 in Japan and $50,000 per capita in the U.S. Debt levels are simply too high to ignore inflation risk.

We continue to accumulate gold and silver in both ETF (GLD and SLV) and physical form as we believe precious metals will continue to be the assets of choice for both the "safe-haven" and "inflation-hedge" trades. Investors interested in a vehicles that retain physical metal, should look into Sprott Asset Management’s Sprott Physical Gold Trust (NYSEARCA:PHYS) and Sprott Physical Silver Trust (NYSEARCA:PSLV).

Disclosure: I am long GLD, SLV, PHYS.