Japans financial system is the third largest economy on the planet and is
starting to come apart at the seams, and the ripple effects are going to be
felt all over the globe. Nobody knew exactly when the Japanese financial
system was going to begin to implode, but pretty much everyone knew that a day
of reckoning for Japan was coming eventually. After all, the Japanese
economy has been in a slump for over a decade, Japan has a debt to GDP ratio of
well over 200 percent and they are spending about 50 percent of all tax revenue
on debt service.
In a desperate attempt to revitalize the economy and
reduce the debt burden, the Bank of Japan decided a few months ago to start
pumping massive amounts of money into the economy. At first, it seemed to
be working. Economic activity perked up and the Japanese stock market
went on a tremendous run. Unfortunately, there is also a very significant
downside to pumping your economy full of money. Investors start demanding
higher returns on their money and interest rates go up. But the Japanese
government cannot afford higher interest rates. Without super low
interest rates, Japanese government finances would totally collapse. In
addition, higher interest rates in the private sector would make it much more
difficult for the Japanese economy to expand. In essence, pretty much the
last thing that Japan needs right now is significantly higher interest rates,
but that is exactly what the policies of the Bank of Japan are going to
produce.
There is a lot of fear in Japan right now. On Thursday, the Nikkei
plunged 7.3 percent. That was the largest single day decline in more than
two years. Then on Monday the index fell by another 3.2 percent.
And according to
Business Insider, things are not looking good for
Tuesday at this point...
In post-close futures trading, the
Nikkei has dropped by another couple hundred points, and has dropped below
14,000.
Are we witnessing the beginning of a colossal financial meltdown by the
third largest economy on the planet? The Bank of Japan is starting to
lose control, and if Japan goes down hard the crisis could spread to Europe and
North America very rapidly. The following is from a recent article
by Graham Summers...
As Japan has indicated, when bonds start to
plunge, it’s not good for stocks. Today the Japanese Bond market fell
and the Nikkei plunged 7%. The entire market down 7%… despite the Bank
of Japan funneling $19 billion into it to hold things together.
This is what it looks like when a Central Bank
begins to lose control. And what’s happening in Japan today will be coming to
the US in the not so distant future.
If you think the Fed is not terrified of this,
think again. The Fed has pumped over $1 trillion into foreign banks, hoping to
stop the mess from getting to the US. As Japan is showing us, the Fed will
fail.
Investors, take note… the financial system is
sending us major warnings…
And all of this money printing is absolutely crushing the Japanese
yen. Since the start of 2013, the yen has declined
16 percent against the U.S. dollar, even though the U.S.
dollar is also being rapidly debased. Just check out this chart of the
yen vs. the U.S. dollar. It is absolutely stunning...
The term "currency war" is something that you are going to hear a
lot more over the next few years, and what you can see in the chart above is
only the beginning.
What the Bank of Japan is doing right now is absolutely unprecedented.
It has announced that it plans to inject the equivalent of approximately
$1.4 trillion into the Japanese economy in less than
two years.
"What they're doing represents 70% of what the Fed is doing here with
an economy 1/3 the size of ours"
The big problem for Japan will come when government bond yields really start
to rise. The yield on 10 year government bonds have been creeping up over
the past few months, and if they hit the 1.0% mark that will set off some major
red flags.
Because Japan has a debt to GDP ratio of more than 200 percent, the only way
that it can avoid a total meltdown of government finances is to have super low
interest rates. The
video posted below does a great
job of elaborating on this point...
It really is very simple. If interest rates rise substantially, Japan
will be done.
Investor
Kyle Bass is one of those that have been
warning about this for a long time...
There's a fatalism, he says, in everyone he talks to in Japan. Their
thinking is changing, and the way they talk to him about debt is changing. They
already spend 50% of tax revenue on debt service.
"If rates go up, it's game over."
The financial problems in Cyprus and Greece are just tiny blips compared to
what a major financial crisis in Japan would potentially be like. The
Japanese economy is larger than the economies of Germany and Italy
combined. If the house of cards in Japan comes tumbling down, trillions
of dollars of investments all over the globe are going to be affected.
And what is happening right now in Japan should serve as a sober warning to
the United States. Like Japan, the money printing that
the Federal Reserve has been doing has caused
economic activity to perk up a bit and it has sent the stock market on an
unprecedented run.
Unfortunately, no bubble that the Federal Reserve has ever created has been
able to last forever. At some point, we will pay a very great price for
all of the debt that the U.S. government has been accumulating and all of the
reckless money printing that the Fed has been engaged in.
