On September 7 and earlier we raised an alarm on the Bank of Japan and the potential for significant monetary issues in Japan in the near future. The near future is apparently here, and the Bank of Japan is moving in the direction to sell U. S. Treasuries to try to stabilize its own currency. Japan’s whole economic system has been predicated on artificially low interest rates, but with the rise of rates around the world they cannot expect to hold all investors at home. Japanese investors are encouraged to move investments overseas rather than focusing on domestic investments.
In recent decades Japan has been the largest purchaser of U. S. Debt, but they stopped several months ago to support their own economy by propping up their stock and bond markets. If they want to continue to live in this monetary fictional world, they will need to buy even more stocks and bonds of domestic companies risking Japan becoming a State-owned economy. It is hard to imagine, but this seems like some strange form of communism or socialism. When you live in a fictional financial world terrible things can happen when you run up against the wall of reality. Japan can control its interest rates, but it cannot control the world’s interest rates.
We may discover that the only purchaser for that many U. S. Bonds is us, “us” as in the FED and the U. S. Treasury. To do this may force the FED to reverse course and go back to money easing (printing) rather than trying to reduce the money supply. That would once again be labeled “Quantitative Easing” (QE) versus the “Quantitative Tightening” (QT) that they are trying now. (See articles on Modern Monetary Theory, BRICS and Yen, and Far Away Events Matter.)
The FED is doing QT to reduce dollars in circulation and to control our own inflation and to straighten out our economy. If we must start the money printing again inflation will surge even more! This is why “Far Away Events Matter” and keeping Congress from giving away more money is key in the November election. Members of Congress know so little about economics, and are pushing to buy votes so hard, that they have transitioned us to a fiscal place that is little better than a third world economy. Another sad alternative is that they do understand and are intentionally pushing us toward socialism by creating unsustainable debt, to be followed by massive taxes, and then redistribution of wealth in a never-ending cycle. This has the potential of creating a society with a political class, a permanent upper class, a permanent lower class, and destroying the middle class.
We are still the best Country to immigrate to, but that is related to our freedoms, opportunities, and our Constitution, not Congress or our fiscal policies. Opportunity is why our southern border is flooded with illegal immigrants. There is nowhere else to go! The countries they are fleeing are in worse shape than we are, but if we don’t get our act together, we will join the ranks of “Third World Economies.” Those migrating here are unaware of economic policy, they can just feel the pull toward the U. S. and push away from where they live.
We already know that all the world’s developed economies only have fiat currencies (the advanced economies or so we are told). We also know that the U. S. Dollar is the reserve currency for all international exchange. A Japanese economic collapse would hurt, but they are not the only holder of our debt. The countries in the European Union are also major purchasers of our debt.
The EU is about to face an economic crisis of its own making where Russia’s stronghold on their energy resources will create a similar set of issues, but with energy prices and inflation, not interest rates, as the core issues. To mollify the masses, they may cap energy prices, print more money to pay energy bills, nationalize their energy sector, or some strange combination of these options.
Any of these moves could kill energy investment in the EU, and cause inflation to spike even higher. We know how State-run businesses work in the energy sector because of the failure and massive inflation in Venezuela. All we need is for the EU to decide that they can save the day by nationalizing their energy sector and try to convert it to state-run green energy. This will cause the complete collapse of all European economies in mass. The only thing politicians understand less than economic principles are energy policies. England might have a survival chance because of BREXIT and a willingness to return to fracking.
Just like the Japanese, the EU collectively holds massive quantities of U. S. Debt. We have already discussed that Japan (~$1.3 T) and China (~$970 B) were the largest debt holders. But they are followed by the United Kingdom, Ireland, Luxembourg, Switzerland, Belgium, Norway, and France each holding at least $100 B. Almost all of these countries have reduced the value of their holdings of U. S. Debt in the past year. Not a vote of confidence, and our rates increases have already devalued their currency against the dollar. If our research is right, then Japan began reducing their dollar holdings this month. This may come directly from the holding of U. S. Treasury Securities or their balance in the Foreign Reverse Repo account but either signals the direction of their investments.
What can we do?
First, vote for people who will put the brakes on Washington spending and money printing.
Second, pray the Russian/Ukrainian conflict comes to a conclusion quickly and energy materials begin to flow again.
Third, move your investments to areas where you feel safe. No one can define “safe” for you because everyone’s financial situation is unique. But there are investments that do well in economic downturns, and you should think through these carefully and discuss them with investors you trust.
It’s going to be a bumpy ride no matter what happens!