As Ambrose Evans-Pritchard is keen to point out, Japan's public debt has now reached 218% of GDP according to the IMF and will reach 246% by 2014. Mr. Pritchard also points to Japan's demographic problem with a low birth rate and an aging, shrinking population.
He concludes that Japan is about to go bankrupt and the Yen will collapse against the US dollar.
In my view, his Yen collapse hypothesis has reached the wrong conclusion.
While, he and I are in agreement that the US dollar is due to rise, the same deflationary forces are at work in Japan as they are in the US that will initiate a "flight to safety". This will drive demand for both US treasuries and Japanese bonds higher (and yields even lower accordingly) once the flight to safety begins. As the US and Japan are the number 1 and number 2 economies in the world, their treasuries are considered the safest bets when the stock market experiences a major correction.
In my view, both the Yen and US dollar are set to rise in the 3 to 9 month timeframe. All that is required is an external shock that will induce fear in the markets.
Will the Yen collapse eventually? Yes, I believe it and the US dollar are mortally wounded and eventually will join a fiat currency "race to the bottom". In fact, I believe that both currencies will collapse at roughly the same time. The collapse of their currencies will accompany a global economic collapse, in my view.
But, now is not the time for collapse, first, they must rise before they dive.
PW, what is your best estimate of the time frame for the collapse of the dollar and the yen? Do you think it will happen within five years?
ReplyDeleteMy best estimate, keeping in mind this is a moving target as future government responses have a large impact on the results, is a two to five year time frame. Of course, I could be early with this timeframe.
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