How the Yen will go from priceless to worthless
A long time ago in the early days of the housing collapse, I participated on a forum for economic discussion to talk about the danger hidden within our banking system. A contributor that went by the screen name of NoThing had an interesting theory. Her, (at least we think she was female), theory in the shortest form possible is that during an economic collapse, that is created by excess debt, the currency will go through 2 polar final stages where initially the currency slowly rises in value and then shoots sharply to a very brief moment of time where it is nearly priceless and then this state is followed suddenly by a collapse where it is shredded into toilet paper.
For some of you, the first thought might be,.. "That's not what happened in Weimar Germany." Which would be correct, except we aren't talking about a hyperinflationary collapse, we are talking about a DEFLATIONARY collapse.
Your next thought might be,.. "How will the currency collapse in a deflationary environment?"
Inherently, deflation is caused by a reduction in available credit, reduced velocity of money, and a steady slide in prices as a result. Deflation becomes a mindset of "Why should I buy XXX when XXX is going to be cheaper 6 months from now." People hoard money, no one borrows because the principal becomes increasingly more expensive to pay off, and competition from retailers for your money drives prices lower.
That is Ben Bernanke's nightmare.
But I digress, lets get back to the question at hand,.. how will the currency collapse in such an environment? Increased bond yields, decreased velocity of money and a contraction of credit should all result in increased value of your currency as less becomes available.
The answer is simple, it will collapse because the crisis was caused by excess debt.
At the time in our discussions, we did not foresee to what extreme the central bank would go in order to try to "fix" the problem. We simply saw massive amounts of excess debt piled up in an asset class that was a bursting bubble. Conspiracy theories aside, had nothing been done, half the banking system would have collapsed and a deflationary crunch would have ensued. However, ... we MAY have survived. At the time, our national debt was 30% lower than it is today and a reset of prices lower may have eventually repaired our country to a degree after some short term severe pain. Much like Japan though, this was not the path we chose.
Japan is a preview of the future of the United States.
Japan has a long standing demographic problem of an aging population. The United States has 10,000 baby boomers retiring a day. Japan had a housing bubble and resulting real estate crash in the late 80's and early 90's. The United States had a housing bubble and resulting crash in 2007. Japan has spent 19 years trying to slay the deflation boogey man and as a result has compiled a national debt that is in excess of 250% of GDP. The United States has used both debt monetization and huge budget deficits to try to stimulate the economy in order to slay the deflation boogey man and now has national debt that is nearing 110% of GDP.
If deflation is creeping into your economy because of excess debt defaulting, the worst thing you can do for the long term future of your economy is try to fix the problem by using more debt.
The past sins of Japanese central planners are coming back to haunt them now. They are losing control because they have exhausted their credibility. It took a long long time, but here they are. Had they taken the pain a long long time ago, what would Japan be like today? No one really knows... but what we do know is that they chose to avoid the pain and to try to delay it into infinity through the use of the printing press and excess debt. There is no way they can survive now. If they lose the last little bit of control they have left, the card on the bottom has been pulled. There is no saving them with national debt at 250% of GDP. They will default.
But first, the Yen will spend awhile on the rise because deflation will finally win. Japanese rates will rise, the Yen will rise, prices will fall in Japan.
The rise in the Yen will continue along with bond yields until credit and velocity of money grinds to a hault. The hoarding will then begin and be followed by the great collapse of a nation and their currency in a relative instantaneous hyperinflation.
This is our own future and we are going to watch it happen right in front of our eyes.
I hope congress is watching and that it opens some of theirs.
