Hi CB, Mirage money created by debt going to money heaven is a bad thing. Real savings going to you-know-where is certainly a worse matter.
I had always believed that Japan, as the largest creditor nation, is in fact the bank of real money to the world. Whenever folks say to me, “Jay, the banks are not hurt this time”, I invariably respond, “Wrong. The biggest bank is very hurt”.
I get puzzled by Japan … and ask, (a) how deep is the blood, (b) will it ever get painful for the obedient population before the last gush of crimson liquid is out, (c) what can they do, and if nothing can be done, (d) what happens after the last gush of blood is out.
The Japanese banks banded together to resist pending legislation that requires disclosure of derivative positions and value lost. This does not bode well for transparency and can only mean bad news is being hidden from view.
The Japanese PM Koizumi speaks of pain for Japan and help needed from the US in process of fixing matters. Why do I think he actually meant pain for the US/world, and help from Japan. In 1997-1998, the Japanese banks in Hong Kong sharply trimmed back their loan, first supposedly due to uncertainty associated with HK 1997 handover to China, then ostensibly due to risk management requirement given onset of Asian Financial Crisis. The shrinking of Japanese loan portfolio in some way helped Japanese bank’s capital adequacy ratios, and probably in some way also helped the US and the hedge funds to subsequently get access to more Japanese savings. Money was pulled by Japanese banks from all over Asia. Hong Kong was able to plug the hole left by the departure of the Japanese given HK’s free capital flow (money arrived from mainland and Taiwan) and high domestic savings (local folks converted offshore money to HKD for interest spread).
Japan, as the bank of real savings, holds the key to whether we have a credit crunch or not. A credit crunch supplementing weak global economy will allow us to travel the time machine to 1929 and see if Friedman’s theories work or not.
This, anyhow, is my Pearl Harbor II scenario. And I believe this potential, together with the 6% real interest rate in Japan, is the reason behind the Yen’s strength relative to its history.
Chugs, Jay |
