Will Japan destroy the yen
to save the dollar?
Jul 10, 2007
As the Japanese government
continues holding short-term interest rates near zero while printing
yen like it is going out of style, getting out of the yen has
now replaced pachinko as the national pastime for rank and file
Japanese. With housewives and cab drivers debating the best
techniques to exchange their yen savings for higher yielding
non-yen assets, the Japanese monetary authorities are facing
the prospect of the complete destruction of their own currency,
subjecting their citizens to the horrors of hyperinflation.
For years, the storied efficiency of the Japanese economy has
kept its citizens from understanding just how much purchasing
power they were losing to inflation. As the extremely productive
Japanese economy worked to lower consumer prices, the inflationary
monetary policy of the BOJ reversed those declines, robbing Japanese
consumers of the benefits of falling prices. This loss represents
a massive subsidy to American consumers.
However, inflation is about to get so out of control in Japan
that prices will soon rise despite the natural forces that would
otherwise have lowered them. As rising prices become impossible
to ignore, perhaps the Japanese will borrow a page from the U.S.
playbook and recalculate their CPI to hide the grim reality.
However, with the carry trade kicking into high gear, such propaganda
efforts will likely not succeed.
The Japanese are pursuing this reckless monetary policy with
the deliberate goal of creating inflation, and they are in danger
of succeeding beyond their wildest dreams. Despite the tendency
of central bankers to argue that consumers are better served
by rising prices rather than falling prices, "deflation"
was never a real threat to Japan. On the contrary, falling consumer
prices are one of the natural rewards that people enjoy in market
economies. The fact that this benefit has been denied to most
people in modern times as a result of government created inflation
is one of the great tragedies of our time. To spare its citizens
from suffering the "scourge" of being able to buy products
at lower prices, the Japanese are close to destroying one of
the greatest savings hordes in history. The question is why
are they doing it?
The only logical answer I can offer is that the Japanese realize
that if they stop the flow of global liquidity they will destroy
the dollar and the U.S. economy. To survive, the U.S. must be
able to both limitlessly exchange the dollars it prints for the
goods the rest of the world makes and then pay low rates of interest
on its IOUs that foreigners accumulate as a result. Were
the Japanese to turn off the monetary spigot and raise interest
rates to normal levels, Americans would not be able to do either.
A real rate of interest on the yen would reverse the carry trade
by creating demand for Japanese assets and diminishing demand
for dollar denominated assets. Such a move would simultaneously
send U.S. interest rates and consumer prices thought [through] the roof and stock and real estate
prices through the floor. The entire U.S. consumer economy would
collapse and Americans would experience the greatest period of
economic hardship since the Great Depression.
This scenario apparently terrifies the Japanese, as they fear
that such a severe recession in American means similar problems
for Japan. However, their fears are misplaced as their real
problem is the enormous cost of trying to prevent this from happening.
Their fixation on what might happen to Japan if the American
economy were to run off the rails has blinded them to the far
greater costs of trying to keep in on track.
Therefore, the Japanese need to carefully consider what they
are doing. They need to ask themselves whether propping up the
U.S. economy, merely delaying its inevitable collapse, is really
worth the destruction of their own currency and the potential
chaos that might create for their own economy? Do they really
want to commit economic hara kiri just to keep their short-sighted
vendor financing scheme going a while longer. Hyper-inflation
would be the monetary equivalent of an atomic bomb. Will the
Japanese really let us do it to them again? If they come to
their senses soon, as they must do to avoid this fiasco, this
time it will be the Japanese that drop the atomic bomb on us!
For a more in depth analysis
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.