October 24, 2008

Time for Japan to Buy

Move aside Bernanke. It is time for Japan to save us all.

What Happens To A Borrowing Nation

Today will be another hard day for the markets, as the devaluation of the dollar verus the Yen causes the Asian markets to collapse, no doubt triggering a collapse here too.

Mary asked in comments the other day, "what happens when America borrows too much?" The answer is currency devaluation: when America borrows, Asia lends. Our borrowing floods the world with treasury notes, pushing their value lower (and interest rates higher).

When we borrow, the Yen should move higher and the American dollar should drop lower. But global markets have been in denial for several years about the declining real value of debt denominated in dollars - and so as we borrow more, instead of pushing the dollar down, the world just keeps buying up more of our debt. The world has had an insatiable appetite for American dollars and American debt.

But cheap goods in America and expensive goods in Japan has become a self-fulfilling problem which (over the last 30 years) has caused Japanese to scrimp and save more. Our overvalued currency has trained Americans to feel wealthier, more entitled, and even more willing to take risks than they should.

That didn't work out very well.

How to Stop A Sudden Correction

So now, currency speculators on both sides of the Pacific are stepping in and forcing the currency change that we have been putting off for decades. The American dollar is getting the Axe.

A suddenly lower dollar is bad for both American consumers and Japanese exporters. If the yen doubles, a Corolla will be as pricey as a Hummer. Obviously that is bad for Toyota-shoppers, but it is a crisis for Toyota too.

What can put an end to the currency crisis?

Japan needs to borrow.

It is very much against the scrimp-and-save culture we have trained them into for the last 30 years. But their economists should do the numbers and realize that this is the only solution that will save Toyota and other exporters from collapsing.

Japan: you are rich. You need to start printing Yen, which in modern terms, means the Japanese government and Japanese banks need to start borrowing and leveraging far more than they currently do.

Japanese Shopping Spree

But you don't "just borrow" - you need to spend your money on something. For the last 30 years, foreigners have bought U.S. Treasury notes and fixed-income investments like mortgages. But if the dollar is getting whacked, fixed income investments make no sense. Devaluation of 10% means you need 10% returns just to break even.

Q: So what should the Japanese buy today?
A: The American Economy.

Japan needs to start borrowing money to buy private sector America. They should start with our banking system - Japan needs to print enough Yen to buy Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Bank of New York Mellon and State Street Corporation - the Paulson protected banks. The Japanese need to make their investment dollars go farther, and nobody knows how to do leverage like American banks.

Then Japan needs to keep going. Japan is famously dependent on imported food and oil - it would make sense to buy the American agricultural and oil industries. They excel at running car manufacturing - buying the American automobile business would be a smart investment. Buying GE would give them a security blanket. They should buy Silicon Valley. They should buy Hollywood.

How Much To Buy

Once Japan owns perhaps a quarter of private sector America - on par with the size of their GDP - currency traders will realize that Japan is serious about spending Yen, and the world economy will stabilize at a new equilibrium.

Our dividends and our capital growth will go to the Japanese. We will all work for Japanese savers. They will feel richer, and maybe they will get trained to spend a little bit more.

And we will feel a little poorer, and maybe we will get trained to spend a little less over the next 30 years.

That is not such a bad thing.

Japan needs to quickly step up and spend their Yen. By borrowing ourselves into oblivion, America has put itself up for sale. The best savers in the world are the Japanese. To save their own currency, they should buy the heck out of us.

Posted by David at October 24, 2008 06:21 AM
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