Sunday, March 13, 2011

Sunday Ramblings

Japan News
As I had feared, the more time goes by the worse the news out of Japan gets. The earthquake was upgraded to a full 9.0 and data shows the main island of Japan moved 8feet and the axial tilt of the Earth may have been changed by 4 inches. The power involved in such a thing cannot be grasped in any reasonable way.

For a visual aid, here is an old picture (found at this site) which shows a fence that was moved 8 feet during an earthquake near the San Andreas fault in California in 1906:

Almost unbelievable.

Of course it was not long before some Keynesian asshole had to go ahead and try to paint a terrifying tragedy as a way to stimulate an economy(via Mish). One has to think Keynesians would support firebombing entire cities to foster growth they are so stupid it hurts to even have to deal with them:
“This is a Keynesian stimulus program that nobody can argue with: just rebuilding the city of Sendai,” said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington, co-author of the 2001 book “No More Bashing: Building a New Japan-United States Economic Relationship.” “Rebuilding Sendai could actually be an opportunity to try to create a growth pole in northern Japan.”
Makes me sick.

Stoneleigh of The Automatic Earth has experience in the nuclear safety area and so if you want a full run down on what to be thinking about concerning the nuclear issues facing Japan (and by extension the environment) please stop on over and read today's piece:
How Black is the Japanese Nuclear Swan?
Thanks TAE!

Economics of the Disaster
Reader Gawains had a comment that was right in line with what I was thinking over the weekend:
This will have a serious impact on financial markets. The yen is a widely circulated currency. Now it's going to have to come home to finance the rebuilding effort. Japan, which is the second largest holder of US treasuries, will probably have to start selling them in order to raise capital. That will have a profound effect on the US economy, and interest rates will necessarily rise.
I happen to think they're been too low for too long, but a forced increase is going to cause major disruptions in the markets.

I may differ with Gawains as I do not think Japan will have to sell Treasuries. They are serial money printers and will issue debt, not raise cash via sales. I could be wrong. What will happen is that Japan will need to crank up funding and this will compete with US debt sales as well. There is only so much liquidity out there and massive debt sales by Japan and our own will strain things a bit.

I penned an article last week showing why Quantitative Easing 3.0 was on the way, and I mentioned that time scales would be compressed. Well ramp that up. The FED will have to continue their buys of paper now, it is almost a sure thing. What will be interesting is that I was thinking the FED would move to municipal debt, mortgage paper (again) and maybe some other junk bonds, but now US Treasuries may be where it is at by necessity. What a mess. Maybe Bill Gross is throwing things at walls this weekend after dumping all of is treasuries?

I have no idea what the short term effect on the gold/silver complex will be. Longer term it seems very favorable as the expansion of paper promises for debt will explode going forward:
-Japan need big money
-The USA needs huge money
-Europe need big money for the rapidly deteriorating debt situation there
That's a lot of paper coming online.

I have a few plans for trades this week but I am not going to write about them as they were not my own, I am mooching off of chessNwine! I am working up some ideas I had tonight and will update later if need be.

Have a good night.


GawainsGhost said...

We can always agree to disagree, GYC.

Here's an article about Japan's disaster and US finances. From the American Thinker.

It just keeps getting worse and worse. Nuclear plant meltdowns--Japan gets 90% of its electricity from nuclear power. And now a volcano may erupt. It's a total catastrophy.

The reason why I think Japan will start selling treasuries is because it really doesn't have anything else to sell. Entire towns wiped out, car plants shut down. I mean, Japan likely won't be able to sell any bonds--it already has a 200% debt to GDP ratio. Its economy has been effectively destroyed for the next several years. Its energy supply has been eradicated. It's just bad all around.

This will have profound repercussions on the global economy. Even if Japan starts selling treasuries, who will be able to buy them? And at what interest rate?

We got unrest in the Middle East threatening global oil supplies. We got one of the largest economies in the world crippled by natural disaster. We got riots and death threats in Wisconsin. And no football!

Good Lord, what a mess. Still, I remain an optimist and have to believe that everything will eventually work itself out.

But this is going to be a painful correction for everyone.

getyourselfconnected said...

I am not sure we disagree here, everything you said I think is right I just do not think Japan will sell their treasury stash at this point. If they do, it will be directly to the FED via QE 3 so maybe you are right. To early to tell so maybe I jumped the gun a bit.

Stagflationary Mark said...

I'll take the other side of this debate. Let's say Japan did sell. What would happen?

1. Japan sells US Treasuries to "the world" for US Dollars.
2. US interest rates rise.
3. Japan gives "the world" US Dollars to rebuild Japan.

That's not the end of the story though.

4. "The world" buys US Treasuries using those same US Dollars.
5. US interest rates fall.

I'm not all that concerned as a TIPS investor, unless "the world" decides to hoard US Dollars over interest bearing US Treasuries.

In a hyperinflationary spiral, everyone would play a game of global hot potato with both US Dollars and US Treasuries (picture no party wishing to hold either for more than a few seconds). I just don't see Japan's earthquake being the trigger.

The bigger concern is if we can't export more US Dollars to Japan because they can't sell us goods. We'll find someone though. We are the masters of trade deficit policies. Sigh.

Stagflationary Mark said...

In other words, as long as we export US Dollars to "the world", then "the world" is pretty much forced to buy US Treasuries. Better to earn some interest than none.

I'm part of "the world". I'd rather bury long-term TIPS in my backyard than US Dollars. I'm not required to own either, but "the world" as a whole is. What can "the world" do? Burn them?

Stagflationary Mark said...

One more thought.

If it ends up being a $100 billion earthquake/tsunami and the US for some strange reason had to pay for 100% of it, then just tack it onto our bar tab. We borrow that much per month as it is. We could call it JARP (Japan Asset Recovery Program).


GawainsGhost said...

Watch this.

It begins with what looks like a shallow wave flowing down the street, not much more than a flood. Then the sea goes Godzilla. By the end, buildings are being destroyed.
History shows again and again how nature points out the folly of men

This level of devastation is rarely seen, but it does and will happen. However, this is particularly bad.

The Nikkei is plummeting. Sony, Panasonic, Hundai, multiple companies have ceased production. 3 nuclear reactors have melting rods, exposing hundreds to radiation and forcing the evacuation of over 500,000. More than 300,000 homeless people in shelters without electricity. It just keeps getting worse and worse.

The ripple effects have just begun, but like in the video by the time this thing is through, it will leave only rubble behind across the global economy.