Last night’s lack of demand for low yielding Japanese government bonds could
be a watershed event similar to, but of far greater magnitude than, the failure
of a debt offering by British Telecom, which marked the peak of the telecom/tech
bubble several years ago.

This event could mark the beginning of a significant, and long over due rise
in Japanese interest rates. The result would ultimately be a disaster for
the United States as increasing Japanese interest rates and a rising yen
would cause a significant flow of global savings out of U.S. dollar denominated
debt into Japanese yen denominated debt. With minimal domestic savings, an
enormous current account deficit, huge public deficits, and over-leveraged
corporate and consumer balance sheets (particularly those with short term
or floating rate debt), a decrease in global demand for dollars would cause
a sharp rise in U.S. interest rates, plunging the U.S. economy into a massive
recession with sky high interest rates, soaring consumer prices, a collapsing
stock market, double digit unemployment, and a wave of corporate and individual
bankruptcies and real estate foreclosures, as soaring interest rates and
a credit crunch finally prick the property bubble.

Interest rates are low in the United States because foreign savers, have,
until now, been willing to loan enormous amounts of money to overly- indebted,
non-productive Americans. This is the result of a temporary, and irrational
confidence that the U.S. dollar will continue to appreciate in value. It
is dollar appreciation that makes U.S. dollar denominated debt a seeming
attractive alternative for global savers. Once the dollar’s inevitable collapse
becomes more widely accepted, the “dollar bubble??? much like the “internet
bubble” which preceded it, will burst, and Alan Greenspan will be powerless
to stop the inevitable surge in U.S. interest rates

Further, this lack of demand for low yielding Japanese government bonds,
could signal that the saving public is finally getting wise to the inflationary
monetary policy of the BOJ, thereby reducing the government’s ability to
deficit spend (a good thing for the Japanese but a problem for Americans).
Contrary to popular miss-conception Japan has an “inflation” not
a “deflation problem??? Properly defined, inflation is an increase
in the supply of money and credit, and deflation is a contraction of it.
Deflation is not falling consumer prices, which is in actuality a good thing.
In a market economy the natural tendency if for falling prices. That is how
living standards rise. It is only as a result of government created inflation
(expansion of the money supply) that in the modern, quazi-market economies,
consumer prices rise, transferring purchasing power gains from the public
to government. The fact that modern governments have been able to fool the
public into believing that falling prices are a problem to be feared, and
that government must print money to prevent this terrible pestilence form
wreaking havoc ranks as one of the greatest examples of Orwellian propaganda
ever perpetrated.

P.S.

97% of Japanese government bonds are owned by the Japanese themselves. Amazing.
Americans own less than 60% of U.S. government bonds. Some in the media are
comparing Japan to a third world country. This comparison is non-senses. Japan
is the world’s largest creditor nation. It is the U.S. that has a balance sheet
similar to third world countries with such a large percentage of its sovereign
debt in foreign hands. Imagine if the U.S government tried to sell 10-year
bonds at 1% interest. They wouldn’t sell any!