Of course I'm using Japan as a bit of a metaphor in that they do not possess the world's reserve currency, their savings rate has historically been much higher than ours, their demographic situation is much worse (though we are headed there), and they import all of their oil. However, they are still suffering the aftermath of massive overleverage and failed Keynesian policies of one stimulus plan after another and QE-to-perpetuity.
I believe the CBO baseline projections on growth to be overly optimistic, and our ratio of debt to GDP could skyrocket in a hurry. Yes, there could be a bond market revolt, but the Fed would merely double down with probably unsterilized money printing in that case. Our total debt to GDP ratio, including entitlements, is roughly 350%, and I'm not sure how that compares to Japan. Of course, we will see massive entitlement cuts and reform if the bond vigilantes start acting up as we need to service the cash flow obligations to appease our creditors.
However, I still see deflation/disinflation as the most serious threat, which is why growth is anemic and yields far out on the curve are so low (and likely headed lower). We are already on our second lost decade, the Fed is out of ideas, except pulling out the bazookas, and somehow the whitehouse thinks merely returning to "Clinton-era" rates and cutting spending by a mere $4 trillion over a decade will get the job done. Talk about being out of touch. We really almost need to go over the "cliff," because it's a start, and if we merely do a patch, we will be facing another downgrade (though, truthfully, we're already there). Once the Euro-Zone starts to really suffer the fate of its own failed Keynesian policy, the sovereign debt crisis will reach our shores. But we are not there yet.
Where's the "Gang of Six" when we need them?
"Forget the Fiscal Cliff: it is merely a much needed economic distraction for the next 3-4 months (distracting from what? Why Europe of course). Yes, it will be resolved, and yes taxes will go up, and yes, debates over it will most likely be carried over into 2013 and nothing will be compromised until the ultimate debt ceiling deadline (because it is really a Fiscal Cliff-Debt Ceiling package deal) is hit some time in March 2013, but eventually one or both parties will cave, right after the market plunges to put it all into the proper perspective as it did around the time of TARP and the August 2011 debt ceiling debate, and a resolution will materialize. The bigger issue has nothing to do with the Fiscal Cliff, which is indeed a sideshow. The bigger issue, as Art Cashin explains, has everything to do with a secular decline in the US economy, where a 1% growth rate will soon be the "New Killing It", where millions more (in part-time workers) will soon be let go, and where businesses no longer generate the cash flows needed to stay open. Art Cashin explains."
http://www.zerohedge.com/news/2012-12-04/out-fiscal-cliff-and-fire-art-cashin-real-looming-malaisehttp://thehill.com/homenews/house/270649-house-republicans-make-22t-counter-offer-to-obama-in-debt-talksklj