The Japanese Yen has lost about 20% of its value compared to the dollar in the last 6 months. The 10 year Japanese Government Bonds (JGBs) are paying 0.61% per year as of Apr 14. This is the ultimate in return-free-risk. You lose about as much each week on the Yen going down as you gain in interest for the whole year. After 10 years you get a total of 6.27%. But if you bought these 6 months ago and the yen did not drop any more in the next 9.5 years, you would still be down 14% in real terms. The Japanese central bank has announced they will double the monetary base over the next 2 years. The Yen will drop further in value, much more than 6.27% over the next 9.5 years, I promise. :-) It is foolish to buy or hold JGBs at this point. As investors realize this they will want to get out of JGBs. But the faster they get out, the faster the central bank will have to print money. The faster the central bank prints money, the faster investors will want to get out of JGBs. We have probably already entered the death spiral and just don't realize it yet. This is explained in my Hyperinflation FAQ and shown in my Hyperinflation Simulation. Japan seems about to have hyperinflation.
After Japan gets hyperinflation, the myth that advanced Democratic countries don't get hyperinflation will be destroyed. After people realize that the Dollar, Pound, and Euro (*) are not safe from hyperinflation, people will want to get out of bonds in these countries as well. There will be huge monetization in these countries and then hyperinflation. Once these 4 currencies have fallen, others will too, since these make up about 95% of the central bank reserves backing other currencies. Faith in paper money in general will be shattered. Japan will be the first Domino to fall, but not the last.
I
think that this hyperinflation will happen far faster than others. In
other hyperinflations people did not understand what was going on,
sometimes for years. When prices are shooting up people will be interested in hyperinflation. With blogs, youtube, facebook, etc. it will not be
long before people understand. Once people understand, the
currency dies. So instead of taking 3 years, it might go from start to finish in only 3 months.
The big question is how soon does hyperinflation start in Japan. Given the Yen's drop on the international markets, the Japanese prices seen for imports are already going up much faster than the 26% per year that counts as hyperinflation. My guess is the bond panic will be obvious within a few months and the rapid price increases come soon after. The central bank is aiming for 2% inflation per year, but I bet they get more than 2% per month, which is 26% per year and counts as hyperinflation. The high inflation in imports and the higher prices exports can fetch will both drive up local prices in Yen. I think Japan will get a month with 2% inflation within the next 6 months. Things could just snap some weekend.
We live in interesting times.
(*) The Euro is different than a normal single country currency, so hyperinflation may be more or less likely than normal.
Vince, you wrote, "After Japan gets hyperinflation, the myth that advanced Democratic countries don't get hyperinflation will be destroyed. After people realize that the Dollar, Pound, and Euro (*) are not safe from hyperinflation, people will want to get out of bonds in these countries as well. There will be huge monetization in these countries and then hyperinflation."
ReplyDeleteI think you underestimate people's capacity for denial. I think if Japan experienced hyperinflation, people would come up will all sorts of reasons why "it can't happen here", such as Japan's extremely high debt compared to other countries.
I believe the short-term consequence of a Japanese hyperinflation would be that money that was formerly in yen would find a home in dollars/Treasuries, or elsewhere.
Now, if two major countries experienced inflation, that would start the landslide.
Another way this could go is a Japanese hyperinflation could set off a global economic crash, which could then lead to global hyperinflation . . . but that is an altogether different pathway than what you posited.
I don't mean that it will follow right away. Maybe it takes another year or two. Yes, short term it might actually help the dollar.
DeleteWhy do you say that a global economic crash leading to global hyperinflation is altogether different? A an economic crash probably results in all kinds of banks needing bailouts which means more government bonds, which the central bank will buy. To me it is really the same thing.
What I meant by "different pathway" is that, in your first case of Japanese hyperinflation, the psychological fear that hyperinflation would spread to other countries would be the driving factor. In the case of an economic crash, fear would also play a huge role, but I see it more as an avalanche of defaults that picks up speed and turns into a worldwide collapse.
DeleteThere is a collapse in both cases, with the ultimate outcome being hyperinflation, but in the first case it's fear of hyperinflation, in the second fear of 2nd party failure to pay . . . a "different pathway" to the same outcome.
I see what you mean. However, I really think it will be both pathways at the same time. Lots of different feedback loops in hyperinflation. It is hard to tell a simple story of what will happen that accurately captures all the complexity.
DeleteYes, I agree it would involve both before it was over . . . .
ReplyDeleteHow about this scenario:
Europe goes down due to banks failing there, which almost happened in the US in 2008. But this time it's more severe because of the additional sovereign debt problems. Many world derivatives are linked to Europe, and fear of counter-party failure-to-pay causes a global credit freeze . . . the world economic system starts to cave.
Governments print big in an attempt to bail out the insolvent banks and countries, which leads to hyperinflation.
Global hyperinflation as the first cause would have to arise due to fear of unstoppable inflation. I wonder if we won't get a European crash first . . . .
Maybe. Maybe the UK first, maybe even the US first. But my guess is Japan first. The currency has dropped in the last 6 months and they clearly have the most extreme debt and deficit numbers, and the politicians have their guy in the bank printing like crazy. Seems like they are all set for hyperinflation. But whoever goes first, the risk of hyperinflation on the others goes way up.
DeleteHere's what I mean by counter-party default setting things off . . .
Delete“Important risks remain in the short-term wholesale funding markets,” Bernanke said today in a speech at a Chicago Fed banking conference. “One of the key risks is how the system would respond to the failure of a broker-dealer or other major borrower.”
The financial crisis revealed that the market for repurchase agreement funding -- where a securities dealer uses collateral for short-term loans with an agreement to reverse the transaction later -- was “quite fragile,” Bernanke said.
‘Worried Lenders’
“As questions emerged about the nature and value of collateral” during the crisis, “worried lenders either greatly increased margin requirements or, more commonly, pulled back entirely,” the Fed chairman said. “Borrowers unable to meet margin calls and finance their asset holdings were forced to sell, driving down asset prices further and setting off a cycle of deleveraging and further asset liquidation.”