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Lack of demand for Japanese government bonds could deal fatal blow to U.S. Economy!

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital.
Peter Schiff
Friday, September 20, 2002
Last night's lack of demand for low yielding Japanese government bonds could be a watershed event similar to, but of far greater magnitude than, the failure of a debt offering by British Telecom, which marked the peak of the telecom/tech bubble several years ago.

This event could mark the beginning of a significant, and long over due rise in Japanese interest rates. The result would ultimately be a disaster for the United States as increasing Japanese interest rates and a rising yen would cause a significant flow of global savings out of U.S. dollar denominated debt into Japanese yen denominated debt. With minimal domestic savings, an enormous current account deficit, huge public deficits, and over-leveraged corporate and consumer balance sheets (particularly those with short term or floating rate debt), a decrease in global demand for dollars would cause a sharp rise in U.S. interest rates, plunging the U.S. economy into a massive recession with sky high interest rates, soaring consumer prices, a collapsing stock market, double digit unemployment, and a wave of corporate and individual bankruptcies and real estate foreclosures, as soaring interest rates and a credit crunch finally prick the property bubble.

Interest rates are low in the United States because foreign savers, have, until now, been willing to loan enormous amounts of money to overly- indebted, non-productive Americans. This is the result of a temporary, and irrational confidence that the U.S. dollar will continue to appreciate in value. It is dollar appreciation that makes U.S. dollar denominated debt a seeming attractive alternative for global savers. Once the dollar's inevitable collapse becomes more widely accepted, the "dollar bubble” much like the "internet bubble" which preceded it, will burst, and Alan Greenspan will be powerless to stop the inevitable surge in U.S. interest rates

Further, this lack of demand for low yielding Japanese government bonds, could signal that the saving public is finally getting wise to the inflationary monetary policy of the BOJ, thereby reducing the government's ability to deficit spend (a good thing for the Japanese but a problem for Americans). Contrary to popular miss-conception Japan has an "inflation" not a "deflation problem” Properly defined, inflation is an increase in the supply of money and credit, and deflation is a contraction of it. Deflation is not falling consumer prices, which is in actuality a good thing. In a market economy the natural tendency if for falling prices. That is how living standards rise. It is only as a result of government created inflation (expansion of the money supply) that in the modern, quazi-market economies, consumer prices rise, transferring purchasing power gains from the public to government. The fact that modern governments have been able to fool the public into believing that falling prices are a problem to be feared, and that government must print money to prevent this terrible pestilence form wreaking havoc ranks as one of the greatest examples of Orwellian propaganda ever perpetrated.


97% of Japanese government bonds are owned by the Japanese themselves. Amazing. Americans own less than 60% of U.S. government bonds. Some in the media are comparing Japan to a third world country. This comparison is non-senses. Japan is the world's largest creditor nation. It is the U.S. that has a balance sheet similar to third world countries with such a large percentage of its sovereign debt in foreign hands. Imagine if the U.S government tried to sell 10-year bonds at 1% interest. They wouldn't sell any!