- The public is slowly but surely waking up to the reality of a global currency crisis. Fiat currencies worldwide are being debased. As the major currencies: USD, Euro, Yen, Swiss Franc, UK Pound are devalued in cycles, other currencies will feel the market pressures for competitive devaluations. Take for example the Asian Tigers: Taiwan, S. Korea and Singapore, if they maintain a strong currency as the major currencies fall in value, their economies will be affected. They will lose export competitiveness and jobs. The problem is made worse by the Chinese Yuan peg to the USD. As the USD drops in value, the Asian Tigers will find it even more difficult to compete with China!
- The reality is: all fiat currencies are being devalued against gold. Gold is making record highs in all currencies. Gold is the insurance against a global race to bottom for fiat currencies! The Germans and many Europeans are waking up to this reality and rushing to buy gold. FT reports: (emphasis mine)
14 May 2010 (Financial Times) — The telephone has not stopped ringing at the Rand refinery in South Africa this week. Panicking German dealers and banks have been desperate to get their hands on krugerrands… The refinery, which usually sells 2,000 coins to each customer at a time, says that last week it received an order from one German bank for 30,000 coins. Another bank requested 15,000 coins…
Frank Ziegler, head of precious metals at BayernLB, one of Germany’s largest wholesale suppliers of gold, says: “People are buying krugerrands like crazy.” The frenzy pushed gold prices to a nominal high of $1,248.95 a troy ounce on Friday while the euro price surged through €1,000 an ounce for the first time. Adjusted for inflation, however, gold prices are still a long way from their all-time high above $2,300 an ounce in 1980.
Although coins account for a small part of the market, they are one of the best indicators of investor sentiment towards the precious metal… …
Other important factors are supporting prices: institutional investors are pouring billions into bullion-backed exchange traded funds; central banks have reversed 20 years of selling gold; some, including the Chinese central bank, are buying it; and mine gold supply growth has stagnated.
there is no indication that Germans are ready to stop buying. Panicked by the possible inflationary implications of this week’s €750bn bail-out, they have been snapping up gold coins and small bars at a faster rate than in the aftermath of the Lehman Brothers bankruptcy.
The European Central Bank says its government bond purchases will be “sterilised” by operations to remove inflation risks. But Martin Siegel, manager of Westgold, a dealer of gold in Frankfurt, says people “are not as dumb as economists. They believe there is going to be inflation and are buying gold to protect themselves.”
German investors are notoriously wary about inflation. While few are old enough to remember the hyperinflation that wrecked Germany during the Weimar Republic in the 1920s, the episode remains etched into the national psyche: archive film from the period has been running on the news in recent days.
The appetite for coins has been so intense that shortages are developing. “In the European market there is a shortage of krugerrands,” says Mr Ziegler. As a result, the premium paid for krugerrands in the secondary market has risen from about 2 per cent to 6-8 per cent.
- In Asia, Japan is the country with the highest debt to GDP ration, well above 200%! The good news is that the debts are held mainly by their own citizens and corporations. However, the likelihood that they will be entirely be paid back is probably close to nil. The only way out is via money printing and inflation. Bryan Rich writes:
So what’s next? One thing is for certain: The sovereign debt crisis will not stop in its tracks. With the rule book in Europe thrown out like last week’s fish, the euro is in devaluation mode and so is the debt of all euro members. When it’s all said and done, likely years from now, the euro may exist in name, but it will be composed of different members and different rules … i.e. a new currency with an old name.
Now, the focus turns to the UK, the holder of the biggest budget deficit of the G-7 world and the most rapidly deteriorating debt load since the financial crisis of 2008 unraveled. But I’ve already warned about the UK as the next wobbly domino.
Today, I want to go into more detail about the country that could prove to be the BIGGEST domino to fall … with a gigantic global quake.
Japan, in Trouble …
Take a look at the table above (top of post). Notice the aggressive growth of debt across nine advanced countries since the financial crisis and global recession set-in. Also notice which country holds the most government debt in the world. By far — it’s Japan.
The Bank of International Settlements (BIS) said in a recent report on the growing debt problems,
“As frightening as it is to consider public debt increasing to more than 100 percent of GDP, an even greater danger arises from a rapidly ageing population.”
And within that statement are two of the three fundamentals in the Japanese economy that have it between a rock and a hard place, making a fix hard to imagine.
Fundamental Problem #1— Declining Savings Rate
As I showed you earlier, Japan is approaching 200 percent of GDP … double what the BIS considers frightening. Moreover the BIS projects, under its best case scenario, that debt could shoot up to more than 400 percent by 2040. So how will Japan finance it? Now, here’s where Japan runs into trouble …
Japan has historically been a nation of savers. The savings rate in the 80s and early 90s had been steadily over 10 percent, higher than any other developed country. That has allowed the Japanese government to sell nearly all of its bonds to its citizens and institutions … to the tune of 94 percent of total outstanding public debt.
But since the economy in Japan went into stagnation in the 90s and given that interest rates for 15 years have hovered around zero, the savings attitudes in Japan have shifted. In fact, the savings rate is now lower than in the U.S. — a nation considered grossly addicted to spending, not saving.
- Fundamental Problem #2— Declining Population
While savings rates have been declining, so has the population in Japan, putting more pressure on the absolute quantity of savings. And it’s only expected to get worse. The projection for Japan’s population shows a big fall over the coming decades due to its ageing demographic.
- Fundamental Problem #3— Non-Competitive Interest Rates
With debt expected to keep growing and revenues and savings expected to decline, Japan will have to turn to the international markets to find buyers of its debt to keep its economy breathing. But there’s a problem with that scenario: Japan’s interest rates don’t remotely match the risk!
Japan’s 10-year debt pays just 1.3 percent. Apparently that was enough for loyal Japanese investors. But that won’t cut it for attracting international capital. Debt in other competitive advanced economies, like Europe and the U.S. are in the 3 percent to 4 percent range right now. So what’s Japan’s ticket out?
A Currency and Debt Devaluation
As I said last week, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations.
In a world where debt has grown dramatically across the globe and economies remain fragile and vulnerable, we’re entering a period where countries will begin competing to weaken their currencies. Europe is already underway by weakening the euro. The UK is likely next. And then, given the fundamental outlook I just laid out for you, Japan’s yen could be in for a huge plunge.
As for the dollar, the U.S. faces all of the vulnerabilities from bloated debt and deficits. But in a world crisis, capital has to flow somewhere, and that will keep U.S. debt in demand … and the dollar too.