The US and Japan aren't going to ever go bankrupt as long as they continue to issue their sovereign debt in their own currency. Worst case case scenario for the US and Japan is that entitlements aren't reformed at all, and the value of the currency gradually slides over time.
There will be nothing "gradual" about it. Capital is
extremely fungible. Three Fourths of US dollars are held overseas. When it becomes obvious that the US intends to monetize it's debt (aside from all the other problems that will cause), most of those will come crashing home, and they will do so very quickly. The dollar is the note of the Federal Reserve, and there will be a world-wide run on the bank. US Borrowing Rates will soar, and the United States will be caught in an interest rate spiral, meaning that we will have to inflate the monetary supply by 10% of GDP
every year just to be able to spend all the money we have promised, and that is
before the world dumps the dollar as the reserve and oil currency. We will shift into hyperinflation, and for a short time annualized rates could rise to the triple digits. With no domestic demand for Treasury Bonds that now pay far below inflation, the abilities of the Fed to combat that will be roughly nil. Japan will probably not last as we know her for another 5 years - even at the ridiculously low interest rates provided by her massive domestic savings rate (which we lack), too many are retiring and being replaced by too few workers. That means that there won't
be any net domestic savings to keep that rate low. The money will flee from Europe to Japan and the US, and then when it realizes that Japan is a doomed ship, it will flee to the US, and then investors (who no longer trust sovereign debt) will look with a jaundiced eye to see if
our downgraded bonds are trustworthy... just as it is becoming obvious that we intend to monetize the debt.
The CBO says that the US Economy will functionally cease to exist in the 2030's under our current path. Frankly, I suspect that is wildly optimistic, as it assumes international stability, strong growth, permanent low treasury rates, and current law reductions in spending. If President Romney serves two terms and fails to structurally change our entitlements, the President that follows him will preside over destruction of the level not wrecked on this nation since the 1860's. I'll be alright - I know how to kill people (with all due respect to Ms Streisand: people who kill people are the most employable people in the world). Many of our fellow Americans whose livelihoods are dependent upon a highly integrated (and frankly fragile) global supply chain and extreme division of labor may find themselves in for a rude surprise.
The eurozone is in a more precarious situation since the nations within it control their own fiscal policy but not their monetary policy...but even in this case, it's likely that the issue will be resolved one way or another in the aftermath of financial crises (either this one or the next one). Eventually the eurozone will have to either abandon the euro, or form a United States of Europe. Assuming Europe eventually solves this problem one way or another, its long term prospects need not be so dire. No nation can ever be forced into insolvency if its debt is issued in its own currency.
Forming a United States of Europe would lead to nigh open revolt at home, and impossible economics abroad for the European nations. The last Constitution required enough obvious ignoring-the-peasantry, and sparked enough of a backlash. Attempts to create an USE will not so much pour gasoline as nitroglycerin on the current fires of nationalism/fascism that are starting to smolder on that continent. As far as fiscal integration and carrying everyone else's burden, Germans have been pushed about as far as they are probably willing to go. Splitting up the EU and letting the southern states restructure their debt (read: declare bankruptcy)
will happen, and when it does massive amounts of "wealth" will disappear and Europe will be in the mother of all liquidity crises at the same time that she is trying to perform massive structural changes to her currency. Good luck with that. Everyone thinks that the losers will be Greece, maybe Spain and Portugal. In reality, it's going to be Greece, Italy, Spain, Portugal, probably Ireland, and quite possibly
France.
I'm not too worried about declining birth rates in the long term for this reason. Additionally, countries facing a demographic collapse could open the immigration valve a bit to ease that problem
Which problem would that be? the problem isn't just that we are shrinking in our populace, it is that our welfare states are built upon a pyramid scheme model, and require steady influx of ever increasing numbers of people
paying into the system. But floods of immigrants into a nation with a welfare state don't pay into the system as much as the natives - they disproportionately
cost the system. Letting in floods of third-world immigrants without welfare state reform to keep them from becoming net fiscal burdens will
exacerbate rather than solve the problem.
That seems more likely in the US than in Europe or Japan, but it's something they should all be considering.
Europe has been trying it for decades. It hasn't worked out quite as hoped - as I describe above, the immigrants come in and go on the dole in larger percentages than the natives, thereby exacerbating rather than helping the problem of too-many-people-taking-and-too-few-paying-in.
