After traveling the world to survey investment dangers and opportunities, I’ve interrupted my travels to rush home and bring you an alarming prediction about the immediate future.
I will reveal the prediction in an emergency conference eight days from today: Tuesday, September 12, at 2PM Eastern Time. So please mark your calendar.
Since you are an Edelson Institute member, there is no cost to join me online. But to get your instructions for attending, you do have to register — by going here.
Then, after you’ve registered, come back here to my column to get these findings from my travels overseas …
Japan: Clear and Present Dangers
Inside the Bank of Japan lurks a monetary time bomb.
It packs more megatons than virtually any financial stress point in Europe or the United States. And when it blows, it could drive a new tsunami of flight capital to the world’s safest safe havens.
Like the U.S. Federal Reserve, the Bank of Japan has been pursuing the most aggressive easy-money policy in modern history. And it has done so despite record federal deficits with massive government borrowing.
For many years, economists almost universally agreed that the most any modern government could safely borrow is 50% of its GDP. Anything beyond that point, they demonstrated, would invite disaster at some future date.
Now, that date is about to arrive in Japan. Its government debt is 250% of GDP, or five times what’s prudent. Even if Japan could somehow run a budget surplus of 1 trillion yen each year, it would take more than 1,000 years to pay off its debt.
Its oversized debt is one reason the country has suffered four economic recessions and four stock market crashes in recent years. Its economy, which not long ago was far ahead of China’s, has now fallen far behind – only $5 trillion in GDP vs. China’s $11 trillion. And this is just a sneak preview of what lies ahead.
The tipping point: A clear and present danger of attack by North Korea.
How does that threat affect people on the ground? Average citizens in Japan think all they have to do is watch for the government’s alert to “duck for cover” when Kim Jong-un’s next ballistic missile flies overhead.
They don’t yet realize how this threat will drive the country’s defense spending through the roof … or how the surge in defense spending will impact Japan’s already-bloated debt monster.
Right now, Japan’s defense spending is under 1% of its GDP. That’s less than many countries located farther from the crosshairs of enemy missiles.
New Zealand, for example, spends 1.1% of its GDP on defense. Nepal, tucked away in the Himalayas, spends 1.4%. Brazil, which hasn’t fought a war in nearly 150 years, spends nearly 1.5%. Even Swaziland, a small land-locked country between South Africa and Mozambique, spends a heck of lot more than Japan in proportion to its economy – 3.2%.
But already, the pressure on Japan to jack up defense spending is mounting by the day. Just last week, Japan’s defense ministry sought a quick $160 million to develop swift, longer-range missiles. And this is just one piece of a 5.26 trillion yen budget that’s likely to be approved for next year.
The funds will pay for ballistic missile defense upgrades, six F-35 stealth fighters, four V-22 Osprey tiltrotor troop carriers – not to mention new naval vessels, including a submarine and two compact warships.
And that’s just the beginning.
Result: Prime Minister Shinzo Abe is looking down the barrel of a sudden pile-up of new debt on top of what’s already the biggest government debt balloon in the world.
And North Korea is not the only external threat he’s worried about …
New Menacing Maneuvers by Mainland China
In the South China Sea, serious territorial conflicts are brewing between China and other Asian nations over the Spratly and Paracel Islands.
In the East China Sea, the primary protagonists are China and Japan, sparring over the Senkaku Islands (Diaoyutai in Chinese).
And these are just two manifestations of China’s military resurgence. The People’s Liberation Army, with about one million more service members than the U.S. military, is being upgraded in one of the largest modernization drives of all time.
According to the U.S. Department of Defense, as recently as 2000, less than 10% of China’s army, navy, air force and air defense services was “modern,” i.e., “multi-mission platforms with significant capabilities in at least two warfare areas.” Today, that modernization metric ranges from 30% to 60%, depending on the service.
In response, other Asian countries are now scrambling to build stronger alliances and draw deeper lines in the sand. Vietnam is aligning itself more closely to Japan to counter China. China has held major joint miltary operations with Russia to showcase its defiance of the United States. And the U.S. is seeking to tighten its knots with South Korea, Japan and even Vietnam.
Among all five countries involved in the disputed islands, China is claiming the largest area, as defined by its “nine-dash line.” In fact, China’s demarcations encompass almost the entire South China Sea.
China insists that both the Paracels and the Spratlys are — and have been — an integral part of China. What’s equally surprising is that, despite decades of conflict with the mainland, Taiwan now agrees.
Vietnam vehemently disputes China’s claims. The Vietnamese authorities argue that China didn’t claim the islands until the 1940s, while Vietnam has claimed both the Paracels and the Spratlys since the 17th century.
Complicating the picture, both Malaysia and Brunei argue that portions of the South China Sea fall within their economic exclusion zones — not China’s.
It’s a miserable mess, which even the Permanent Court of Arbitration in The Hague has been unable to unravel. And believe me, they tried.
The court declared that China’s so-called “nine-dash line” is absolutely invalid. And it flatly rejected every argument that China has made, drastically reducing China’s maritime rights in the Spratly chain.
International observers unanimously describe the ruling as an overwhelming defeat for Beijing; a game-changer for Asian maritime disputes.
But ironically, precisely because the ruling was so sweeping, China explicitly declared it’s going to totally ignore it.
Then, it proceeded to reinforce its aircraft hangars in the Spratlys, each tailored to accommodate at least 24 fighter aircraft and up to about a half-dozen larger aircraft on a permanent basis.
And just this month, Chinese ships gathered at Sandy Cay, a set of sandbars near a Spratly island occupied by the Philippines.
All more pressure on Japan and other Asian nations to spend and borrow more!
Other Regions on the Cusp of
Conflict and Economic Turmoil
The escalation of defense spending and government debt isn’t limited to East Asia.
Saudi Arabia, which already spends 8% of its GDP on its military (nearly double the U.S.), is rushing to buy more.
It’s military budget has already surpassed Russia’s. This year it’s jumping ahead with another 6.6% increase. And that’s before the country begins to really feel the stress of internal conflicts I warn about in this video.
Turkey’s government is especially paranoid about internal threats. So its increase in defense and security spending is a whopping 11% this year.
And that doesn’t even include some emergency budgetary measures in response to security threats from neighboring Syria. When I was in Turkey recently, I also recorded this video to help put it all context for you.
Europe’s debt crisis is also still lurking inches below the surface.
So if you think its financial troubles are a thing of the past, watch this video that I taped on my recent trip to Italy.
Then, if you haven’t done so already, be sure to register for our emergency conference of September 12.
That’s when you and I will get together online, assemble all the pieces, and lay out an investment action plan you can follow immediately.
Good luck and God bless!