Cracks in Japan

If you're like most Americans, you have probably missed the news this past Monday morning that the Japanese prime minister Shinzo Abe has called for snap elections and a dissolution of the current government body that has previously given him stern opposition.

In effect, he is seizing the moment of higher approval ratings that are currently hovering above the fifty percent mark and put him in a much better position to make this move than his thirty percent approval ratings just months ago. So what has changed? He is finding the opportunity in the North Korean threat, which has propped up his approval despite an economy that is in deep trouble.

Japan's annual debt is currently over twice its own annual gross domestic product. This means that Japan has to continue borrowing and use its own quantitative easing variation of the program in order to keep up the illusion of a functional economic health.

Essentially, the world's governments are all doing this. They are borrowing from each other with money they do not have, treating each others' debt as assets. So we are all essentially stuck holding each others' IOU notes that on which we can barely pay the interest. The problem with playing this global game of musical chairs is that sooner or later the music will stop... and there will be no chairs.

Every time the governments borrow, print, and dilute money; they are in fact devaluing the currency each country uses and its people earn. Therefore, these measures are going along a curve of continuously diminishing returns. As a result, there will come a time when these measures will become completely ineffective. And that's when the music will stop.

Japan, with the highest ratio of debt to GDP, will be one of the first, if not the first country to fall in this setting. Shinzo Abe, being the proponent of monetary easing measures, is seeking to consolidate power and reduce opposition, as his Monday power move has proven.

In America, we will likely be the last nation to feel the impact of this global wave of deflation. The reason is once the dominoes begin to fall, all foreign countries' biggest capital holders will transfer their wealth to the United States market, as it is seen as the most stable. But this will ultimately prop up our assets only to fall the farthest and in the most painful devastating fashion.

That is why Japan matters, why foreign economies we have ties with matter - our economic well being is intertwined with the countries whose debt United States lists as assets. We must recognize that the troubles we are seeing in armed conflicts across the world and natural disasters that devastate other countries are not just "their problem", it is in fact our collective problem.

So do not be deceived by the skyrocketing Dow Jones and S&P 500 in the next few years. These events occur because of the money coming in from foreigners to temporarily avoid the calamity that their nations are enduring, one that will ultimately come our way in the end.

For now, the market will be a good place to keep your savings and retirement. But once the music stops, the only assets that will be safe are defensive ones, whose value doesn't fluctuate based on paper currency.