The earthquake, tsunami, and nuclear disaster that hit Japan this past week and the destruction that it caused is nothing compared to the tsunami of inflation that will soon hit the U.S. as a result of this crisis. A tsunami of inflation in the U.S. will mean a complete collapse of our monetary system, which could lead to millions of deaths due to a lack of food and heat. 44 million Americans are now dependent on food stamps, but when the U.S. dollar becomes worthless as a result of hyperinflation, the government will no longer have the power to support these Americans and many of them will simply starve to death.
Japan’s citizens were smart enough to save up $885.9 billion in U.S. treasuries to spend in a situation like it finds itself in today. The U.S. has no such savings and is the world’s largest debtor nation. Our ability to survive depends on our ability to print money that has purchasing power. The only reason the U.S. dollar still has purchasing power is the dollar’s status as the world’s reserve currency.
All Japan has to do is sell their U.S. treasuries and they will have the financial resources necessary to rebuild the parts of their country that were destroyed by this past week’s disaster. However, U.S. Treasury Secretary Timothy Geithner said on Tuesday that he doesn’t think Japan will unload their $885.9 billion in U.S. treasuries. It remains to be seen if Japan will do the right thing and sell their U.S. treasuries or if they will make the mistake of continuing to artificially prop up the U.S. economy.
The Central Bank of Japan (BOJ) in recent days has already been repeating many of the same mistakes the Federal Reserve made in the U.S. After this past week’s disaster, the BOJ printed hundreds of billions of dollars worth of yen in an attempt to prop up their financial markets. Japan’s central bank should be raising interest rates, which would encourage its citizens to increase their savings so that they have more resources to rebuild their country and invest into the production of clean energy. By printing trillions of yen out of thin air, the BOJ will cause prices to rise for the very building materials the Japanese need to purchase in order to rebuild.
Although the yen has been rising in recent days, it would be strengthening a lot more if it wasn’t for the BOJ’s actions. In fact, NIA believes that while the yen may continue to rise in the short-term, the yen is now likely to lose a substantial amount of its purchasing power over the long-term. Instead of allowing the yen to strengthen so that it is cheaper for the Japanese in import copper, iron, steel, oil, natural gas, and other commodities needed to rebuild, the BOJ’s actions are actually hurting the Japanese and having the effect of propping up the U.S. economy in the short-term.
The mainstream media frequently talks about Japan’s national debt and how it is 225% of their GDP. However, Japan owes most of their national debt to themselves. We have a much worse national debt crisis here in the U.S., where we owe half of our debt to foreigners. Not only that, but once you include America’s unfunded liabilities for Social Security, Medicare, and Medicaid, along with its debts for Fannie Mae and Freddie Mac (which are now government backed entities), total U.S. debt obligations now exceed $76 trillion.
The Japanese economy reached peak consumer spending in 1990 and entered their “Lost Decade” of deflation with a balanced budget, high savings rate of 15%, low unemployment rate of 2%, and a net debt to GDP ratio of less than 20%. The average American peaks in spending at age 46 and the last babyboomer just turned 46 in 2010. This means the U.S. economy just passed peak consumer spending, similar to Japan in 1990. Instead of entering this decade from a position of strength, the U.S. has entered it with a real budget deficit of $4.3 trillion, a savings rate of only 4%, a real unemployment rate of 22%, and total debt obligations that are 5 times higher than GDP. We won’t be so lucky to escape this decade with deflation, but will instead be faced with hyperinflation as the world loses confidence in the U.S. dollar and rushes to dump their dollar-denominated assets.
When Japan comes to their senses and realizes just how dire the fiscal situation is in the U.S., they will realize that they are much better off investing into their own economy and abandoning the U.S. economy. Just the fact that Geithner is now saying that he doesn’t expect Japan to dump their U.S. treasuries, illustrates just how nervous the U.S. government is about the U.S. dollar and how devastating it would be for all Americans if the Japanese did dump their treasuries. No amount of tax increases and spending decreases will ever allow the U.S. to balance its budget. All the U.S. government can do is talk up a strong U.S. dollar, because they have absolutely no real way to keep it propped up.
All NIA members know that Geithner is perhaps the biggest liar in the U.S. government today. Geithner has long said that the U.S. will not monetize its debt, yet the Federal Reserve is now the buyer of 70% of U.S. treasuries being sold. Foreign central bank purchases of U.S. treasuries have fallen from 50% down to 30%. The days of the U.S. exporting its inflation to the rest of the world are now over.
The U.S. just reported a record budget deficit last month of $222.5 billion, a bigger deficit than the entire year of 2007. Up until today, the U.S. has been paying off its debts plus interest by selling larger amounts of U.S. treasuries to new buyers. This is effectively a ponzi scheme, although the U.S. government will never admit it. Even if Japan doesn’t sell the U.S. treasuries they already own, that won’t be enough for the U.S. to keep this ponzi scheme going. The U.S. needs Japan to keep buying U.S. treasuries, but not only that, they need Japan to buy larger amounts of U.S. treasuries than ever before. The odds of Japan increasing their U.S. treasury purchases during this time of crisis are close to zero, they simply don’t have the financial means to do so.
If Japan doesn’t step up its U.S. treasury purchases, who will pick up the slack, China? Geithner infuriated China last year by calling them currency manipulators and since then, China has been rapidly expanding the yuan’s use in cross border transactions and is now setting up the yuan to be the world’s next reserve currency. NIA believes China is likely to stop buying U.S. treasuries, and will instead loan money to Japan to help in their rebuilding efforts.
It is unbelievable just how many of the economists featured by the mainstream media are calling the disaster in Japan a “stimulus” for not only the Japanese economy, but also the U.S. economy. When a country is forced to rebuild an asset that it already had, it is not stimulating the economy, but is spending resources that could have went towards increasing the production of goods and services. When Japan is eventually finished rebuilding the parts of the country that were devastated this past week, the country isn’t going to be better off than they were before the crisis. They will likely be even more deeply in debt, with less foreign currency reserves, and a much larger money supply. The Nikkei will likely be a lot higher than it is today due to inflation, but the yen will be worth a lot less and the Japanese will be far less wealthy as a result.
America has nothing to benefit from Japan’s rebuilding efforts. Most of the commodities that Japan will import as part of their rebuilding efforts will likely come from Australia, China, and even Canada, with very little of it coming from the U.S. All of the fear and uncertainty in the world today is not going to cause another rush into the U.S. dollar like there was in 2008. When the world dumps risky assets in uncertain situations, the U.S. dollar is going to become one of the risky assets that it dumps. With all of the world’s central banks now fixated on printing money in order to “solve” any short-term economic problems, gold and silver will be the new beneficiaries of all safe haven buying during times of crisis. Don’t let yesterday’s dip in gold and silver fool you. Precious metals were due for a dip and would have sold off no matter what. Now is the time to load up with precious metals before the Federal Reserve begins dropping hints of QE3.
March 16, 2011
Source: National Inflation Association