Currency Wars and Collateral Damage
The collapse of the Japanese Yen is but another casualty of central bank mismanagement. The Dollar will be next.
Good Morning - and now for a diagnostic on the social consequences of interventionism and government incompetence.
It has been several weeks since the Japanese Yen began an accelerated inflationary drop against the dollar. However, the Yen's collapse, while graduated, has been underway for decades.
In fact, while the Yen is down almost 10% for the year, it is the 4th year in a row the Yen has declined.
As a result, according to the FT, Japan (and everywhere else) is becoming "a two-speed economy, with exports and tourism benefiting from a more competitive exchange rate while households and small businesses are squeezed by rising import prices."
Of course, the reality is far worse. The Ministry of Finance has been coy about their intervention, a deployment of an estimated 3.66 trillion yen ($24B USD) to buy back a falling currency. Equally, the Fed has been quiet about its backdoor dealings to stabilize the Yen through an FX swap line that gives the BOJ access to dollars. (see more here: https://lnkd.in/eCv_E882)
However, a far darker social catastrophe lurks ahead. As Leo Lewis put it in the FT a couple weeks back:
"Among the various possible paths throughout 2024 and into its mid-term future, there is one that Japan affects to fear most: a notional descent into the disorder, disparities and dysfunction it associates with emerging economy status."
A recent report published by the Ministry of Economy Trade and Industry was just as stark. The report argued for swift and radical reforms to Japan's economy and corporate leadership. Without such change “even social stability could be lost,” the Meti report concluded.
While this situation seems very bad for Japan, the diagnosis above extends to the United States as well.
No longer does America live in a world where our economy and financial system are insulated from the rest of the world. This is not 1997 when an Asian Financial Crisis struck East / South Asia and the US was untouched.
Today, the collapse of the Yen requires the BOJ to take extraordinary actions that work agaist the interests of the United States, namely selling US Treasury bonds or de-dollarizing. At the same time and for similar reasons, China's PBOC just announced one of the largest reductions in US Treasury bonds in recorded history (see here: https://lnkd.in/e7Fd2jqz), some $53B worth.
All this at a time when US fiscal spending is accelerating dangerously and is the only industrial driver of US GDP that remains.
The result of this mess will be a sharp, painful and abrupt drop in the standard of living for most, if not all Americans. It will also entail massive layoffs in the public sector upon which tens of millions of people depend for income and benefits.
Stay liquid, stay alert.
https://lnkd.in/e2CVDTC3 hashtag#Japan hashtag#Bonds hashtag#Currency hashtag#Inflation