Insider

Implications of a Collapsing Japan

Monday, March 5, 2012, 12:00 PM
Enroll NowFor enrolled members only. Enroll or Sign in to read the full article.

Implications of a Collapsing Japan

by Chris Martenson
Monday, March 5, 2012

Executive Summary

  • Why Japan can no longer increase its US Treasury debt levels
  • Japan's ticking insolvency time bomb
  • Why its current recession is adding gasoline to the fire
  • The most likely progression the Japanese collapse will follow
  • The impact a collapsing Japan will have on global markets
  • What investors should do now

Part I: Japan Is Now Another Spinning Plate in the Global Economy Circus

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Implications of a Collapsing Japan

Back in March of 2011, when the Fukushima situation was just unfolding, one scenario that had me concerned was this one:

For decades, the world has been running its own nuclear-style reaction, only in the currency and debt markets, where exponentially-accelerating piles of debt and money have spun about faster and faster in a gigantic, complex, coordinated reaction, the core of which is, and always has been, the United States.

At the very center of this ungainly money reactor is the main fuel pile itself, the US Treasury market. With any interruption to smooth flow of money through this pile, it will immediately become unstable.

The threat I see goes like this:

Stage 1:  The world watches, riveted, as Japan suffers a tragic and horrible earthquake and tsunami, but as horrifying as these are, they are localized phenomenon affecting a relatively small percentage of the country. The real trouble lurks within damaged nuclear plants, which are now ruined and will never again produce electricity for Japan, creating instant shortages that will take years to remedy. Worse, a dangerous plume of radioactivity is carried south by winds. Tokyo partially empties and shuts down for all practical purposes.

Stage 2:  The abrupt slowdown of the world's third largest economy alters the smooth flow of cash around the globe, and even causes reversals of some other long-standing flows. Chaotic eddies emerge in a decades-old pattern of ever-increasing flows of money into and out of the money centers, and various carry-trade and other interest-rate-sensitive strategies blow up. Manufacturing in Japan screeches to a halt, disrupting just-in-time manufacturing strategies both internally and across the globe.

Stage 3:  In order to fund the rebuilding effort, Japan has to buy a lot of items from foreign suppliers at the same time that its exports plunge precipitously. At first Japan simply does not participate in US Treasury auctions, leading to a shortage of buyers. But eventually Japan has to sell some of its vast hoard of US bonds in order to pay for external items needed for its reconstruction. Further, insurance companies, huge holders of US bonds, face stiff liability claims in the wake of the worst natural disaster to hit a heavily industrialized center and are forced to redeem enormous amounts of Treasury paper. US Treasury yields begin to climb.

Stage 4:  Continuing unrest in the MENA region serves to keep oil elevated and local funding needs high, while Europe's weaker players (the PIIGS) continue to slip under the waves. Money continues to ebb away from the US Treasury market. Forced by circumstance, the Federal Reserve reverses its linguistic course and opens the monetary floodgates once again. There's nothing like a crisis to justify more money printing, especially to a one-trick pony (the Fed) that only knows how to stamp its hoof on the 'print' button.

Stage 5:  An increasingly chaotic monetary and fiscal situation spills over into the derivatives arena, creating a number of financial accidents. Stressed governments find themselves in more of an arguing mood than a pull-together-and-sing-Kumbaya mood, and agreements are hard to come by. Banks begin to fail again, global trade falls off, unrest continues to build, and then it happens - a currency crisis.

Stage 6:  Everything changes. Faster than you think.

Obviously, Tokyo did not get evacuated as the scenario postulated, but given that the piece was penned on March 15th and posted on March 16th, just four days after the devastating earthquake, it was a reasonable scenario to consider (especially considering the Japanese government was considering that exact possibility at the very same time). Looking back on that scenario now, it stands up pretty well in all other regards. 

Enroll Now
Or Sign In with your enrolled account.

Related content

12 Comments on Implications of a Collapsing Japan

Enroll now or Sign In to read all member comments.