Bernanke, Geithner and the Japanese Solution

A curious financial situation has developed in Japan. Largely overlooked in the American press, Japan now has built up a staggering national debt that is approaching 300% of their GDP. This debt exists at the same time that there is tremendous alarm in the global media over Greece’s debt, that is only about 130% of GDP. (And lest we feel smug about those spend thrift Greeks, our own debt is now more than 100% of our GDP, and unlike Japan, we have a trade deficit rather than a trade surplus.)

Why has Japan’s monstrous debt been ignored by the press? Invisibility. Japan’s solution to their tax shortfalls in the midst of long-term economic stagnation has been to keep 95% of their national debt at home. With artificially low interest rates, and by buy buying their own debt, the Japanese have insulated themselves from criticism by foreign creditors, and they have stabilized the value of the Yen on the FOREX. (In the past 20 years, the relative value of the Yen has increased versus the U.S. Dollar.)

I anticipate that Bernanke, Geithner, et al will learn a lesson from Japan and even take it a step further: Through the Quantitative Easing debt monetization mechanism (where the government buys its own debt) there will never again be news of a “failed Treasury auction.” Any unsold American debt instruments will be bought by Uncle Sugar, with the cooperation of the Federal Reserve. Eventually, foreign investors will see through this ruse, and they’ll stop buying U.S. Treasury paper. They’ve already cut back, drastically. It is noteworthy that they’ve sold $85 Billion worth of Treasury paper in the past six weeks. But not to worry, Helicopter Ben will rescue us. They will buy more and more of the Treasury paper. The mass media will play along, by soft-pedaling the significance of this trend. Within a few years, I can can foresee the Federal Reserve buying the majority of the Treasury debt offerings. This will keep interest rates low, which is a key factor in keeping the economy chugging along. But the end result of all this will be be that the number of electronic Dollars in circulation will double. Then it it will quadruple. This will go on and on until one of two things happen: Either A.) Foreigners force a formal revaluation of the Dollar, or B.) Mass inflation ensues. Regardless of how it plays out, the current policy (which has already doubled the money supply since 2007) will destroy the U.S. Dollar as a currency unit.

Inflation is a wonderfully insidious tool used by governments to allow them to spend more than they earn. But when they over-do it in a binge of “Quantitative Easing”, there can be only one endgame. They will destroy the buying power of the currency and its value in foreign exchange. 98% of the populace are so caught up in their daily lives, watching America Idol and munching on Doritos, to recognize what is really going on. It will only be after mass inflation kicks in that the Generally Dumb Public (the other GDP) will become alarmed. But by then, their life savings will be ruined. Anyone that is on a fixed income will be wiped out.

Only a prescient few will have the wisdom to divest from their Dollar-denominated investments and reinvest in tangibles and productive farm land that is well-removed from urban centers. As I’ve written before: Buy guns, buy common caliber ammunition. Buy remote farmland where you can grow crops and raise livestock to both earn a living and feed your family. Why “remote”? Because when things come unglued later this decade, you won’t want to be anywhere near a big city. It is time to hunker down. folks!

The handwriting is on the wall. What are you going to do about it?