I don't think the Japanese would do anything rash like dumping all their treasuries onto the market. If they do it will be slow, orderly, and quietly, with US coordination and assistance.
Tom, sort out some assumptions here. First, and most importantly, while the Japanese do own a huge pile of American debt, not all yen-purchased treasuries are own by the Japanese. For the past several years, hedge funds, international money players, and others have borrowed yen (at low rates) converted them into dollars and bought U.S. treasuries (paying much higher rates). This was free money as long as the yen stays cheap relative to the dollar. If the yen starts up (which may have began this past week) those transactions will be quickly unwound -- i.e. treasuries sold with dollars used to buy back yen and repay loans. Clearly, if this starts it can escalate the yen's rise & dollar's collapse as not only the speculator's money gets chewed up but the Japanese also bail out of another losing investment. (btw, if you think the U.S. is going to assist in these transactions, who do you think it going to be buying this debt? can't be another Asian country & if you think it might be EU countries, see below.)
Second scenario -- suppose the Hong Kong dollar (which is pegged to the U.S. dollar) again comes under heavy selling -- it's still very vulnerable. China, not wanting to be blamed for any economic calamity in HK, is likely to defend the HK dollar. Nearly all of China's foreign reserves, which must be sold to protect that currency, is in U.S. dollars & treasuries.
Third scenario -- the EU wants to insure the stability of its new currency by having it accepted as an international reserve currency, substituting for, or perhaps even replacing the U.S. dollar. If the dollar starts to seriously weaken, the EU may get its wish. That's simply more fuel for the fire.
None of these scenarios may necessarily play out to the extreme of seriously destabilizing U.S. markets (i.e. causing the BK). But, keep your finger in the wind. Watch closely the yen-dollar exchange rate, stability of HK dollar, and U.S. (market-based) interest rates. You may just be able to get a glimpse of the tsunami before others.
bon chance, Kip |
