Earthquake of Consumer Prices, Tsunami of Dollar Dilution

Charles E. Carlson

When the earthquake and 26 foot tidal wave hit Japan, a financial tsunami was also on the way to Washington DC, headed straight for the vulnerable dollar; not one in a thousand Americans knows a financial tsunami is on its way or why. The impact will sock some 80 or 90% of us consumers into much higher prices.

The undertow of dollar dilution had already arrived in every basic commodity from rolled oats to copper. But the tsunami wave is yet to arrive. World bankers are busy squandering for war as we write, trying to deny and delay the inevitable loss of buying power by artificially putting the blame on the Japanese people, who had nothing to do with creating the dilution problem.

Tsunami, a trigger for dollar dilution

It is forecast that Japan's government will have to come up with $200 billion (probably twice that much) to get Japan's industry running again. Where is Japan to get all this money? The answer is, Japan's treasury has enough US Treasury bonds and bills in hand to pay for two Tsunamis. But if they spend those dollars, it will drive down the value of every dollar Americans hold, driving up our prices. This is why the price of things, from petroleum to corn, cooking oil, meat, and especially valuable metals, are exploding.

If Japan sells even half of its $850 billion in US Treasuries, it will devastate the dollar. Worse, China holds many more dollar bonds than Japan, and has been resisting the temptation to sell for a long time. If Japan sells dollars, China will see the handwriting on the wall and also sell US spendthrift bonds... bringing the end of the dollar as a world reserve currency, and diluting our savings accounts and the buying power of government and state bonds.

How did Japan become one of the US's biggest creditors? Japan has been relatively frugal with its money for two decades. It suffered through what was called the "Lost Decade" starting in 1990, when the Japanese rediscovered the value of frugality and savings. It hurt, but Japanese people saved. The value of the yen has been creeping up for years... a simple rule of money is, spendthrift nations have weak currencies (dollar) and frugal ones have strong currencies (yen). Japanese citizens have saved some 15% of income much of which is invested in Japanese government bonds, while most Americans have been spending more than they earn.

Now Japan is being strong-armed by international bankers and its own spendthrift politicians to make a decision that will satisfy the world's central bankers, led by the USA. One week after the tsunami hit, the US-led Group of Seven made a desperation statement, strong-arming Japan not to sell its US bonds. The Group’s bankers announced they will "intervene" in the currency market to prevent the Yen from going up -- this means keeping the dollar from going down.

The impact on the currency markets was instant and dramatic, the yen went down, temporarily. Will Japan rationally sell US Treasury bonds to pay for the tsunami, or will it print money to the detriment of its own citizens?

A few days later, Japanese politicians in its Diet Parliament were openly campaigning for a change in Japan's policy to print the money. Central Bank of Japan Chairman Shirakawa made a profoundly simple and honest answer, explaining,

“If a Central Bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives' and the economy, as has happened in the past."

Japan's choice in this time of unimaginable tragedy is illustrated as follows. Suppose you have an uninsured disaster at your home, say the roof blows off, and you have to come up with $5,000 dollars right now, or move out. Suppose further that your neighbor and friend owes you $5,000 that you loaned to him two years ago to bail his eldest son out of jail for possession and DUI, money you loaned him when he was desperate, and you had just received a windfall. Now you’re desperate, you must have a roof. Would you insist your neighbor pay you what he owes, even if he has to borrow the money, or would you put it on your credit cards and increase your own indebtedness, with interest and fees?

The spendthrift warmaking neighbor is the all powerful US government. It may suggest a no-fly zone over Japan if it does not yield! And the Japanese government may be intimidated to print for a while, but in the long pull it has no choice but to sell its dollars. In a very real sense, the financial tsunami may hit the US harder than it has hit Japan because we have much further to fall. Maybe we need our own "Lost Decade" to get our thinking right. Say hello to the first American Tsunami.




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