This will be a relatively short post today:
I awoke this morning, rather late, to find that Japan had been hit by a second earthquake. A 7.9 hit before the 8.9 (now revised to 9.1) humdinger last night, and I thought about venturing onto the FOREX, so as to short the Yen (Japan’s currency of choice). I decided not to. I feel better about that decision now. Making money off death and destruction is the business of hedge funds, not mine. But, enough about moral quandaries…on to the subject at hand.
Japan has an interesting relationship with the United States. 70 years ago, we dropped the A-bomb on them, and ended our war with the Axis powers (the original ‘Axis of Evil’, consisting of Germany, Japan, and Italy). We helped them rebuild. In return for our investment, we received reliable cars, better technologies, and white cats in dresses, emblazoned on every consumer good you can think of.
They also invested in us, or rather, served as surety for our debts. While China is the second greatest holder of US debt (the Fed is first), Japan comes in a close 3rd. This is where a possible problem arises.
Let’s say you are a typical household. You have some cash in the bank, your home, and a large portion of it in stock. For reasons unknown, your home is uninsured, and burns to the ground.
What happens to the stock? Well, you could go live in a cardboard box, and allow the stock to appreciate. More than likely, you are going to dump the stock, and get some cash to rebuild, especially if you have a wife to take care of. Do you really care if GM tanks after you liquidate your position? Not really. You care about keeping your marriage intact, and rebuilding your life.
Japan’s house just burnt down. They are an indebted nation, as well. Guess what they hold? Our long term Treasury debt. Does Japan need to rebuild in 30 years? Nope. They need to rebuild now. What is the most logical option? Dump the US debt you hold for cash, and get on with it.
This comes at a particularly bad time for the US, on the debt side, as just days before, PIMCO exited their position in US Treasuries, for cash. What does this mean? Very bad things. PIMCO was one of the last major holders of US Treasury debt domestically. Will China step in and buy the debt Japan is selling, or will the Fed go in and buy it, pushing inflation that much higher?
Japan doesn’t just hold US debt, they also hold European debt…strugglin’ doesn’t even come close to describing the European Union’s current woes. This earthquake threatens to create more than physical aftershocks, and I fully expect this to be a tipping point in the debt markets
What seems to have been ignored in all the talk of possible nuclear meltdown, is the destruction of farms within the nation. Japan is a small nation, and has relatively little land to spare for agrarian purposes. This made the land that was used for this purpose very valuable.
Japan will be more dependent on imported food now…not to mention oil, as at least one oil refinery caught fire in the mayhem. The worldwide commodity system has been brittle lately. As we have seen with Libya, it only takes a small, rather insignificant country in the grand scheme of things to upset the economic applecart.
You will notice that I called these the “non-humanitarian” reasons we should care. I would add that these factors are humanitarian in nature, at least when it comes to the rest of the world. A major challenge with a global economy, is the fact that all supply chains are interconnected.
Japan’s problems are not limited to Japan. They have a measurable effect on the rest of the world. A sarcastic, rhetorical question that used to be asked was “What does that have to do with the price of tea in China?”. These days, it’s not hard to draw inferences.
The next few months will be difficult for Japan, and the rest of the world. My thoughts and prayers go out to those who were injured, the families who died, and the many whose lives will never be the same.
Signing off…