Japan’s Crisis Effects on the US Economy
The recent earthquake, tsunami and nuclear reactor explosions have devastated the world’s third largest economy. In addition to the damage, entire industries have shut down, including Toyota and Honda. What is heartwarming are the Japanese people and the way they have handled the situation. They have been very calm and patient. They have been waiting in lines for food and water. I haven’t seen any looting or pandemonium. That is a testament to their culture.
We live in an economically driven world. While it may seem too soon to discuss the economic issues while radiation danger is still the main concern over there, I think it is a good idea to speculate a little on what impact this tragedy could have on the US economy, especially the Dollar.
Most pertinent to the US Dollar is the fact that Japan is the third largest buyer of US Treasuries behind the Federal Reserve and China. Japan currently holds around $877 billion worth of US Treasuries. With the deficits that we are running in the US we need buyers of our treasuries now more than ever. Because of the recent crisis, Japan is more likely to sell US Treasuries to fund their rebuilding process than they are to buy more of our government debt. So not only is Japan likely to stop buying our debt, but they are also more likely to start selling what they already own to obtain more cash. This is problematic for the US, and is a sort of double whammy. The Fed will likely have to step up its purchasing, ergo printing more Dollars and creating more debt.
Look for Quantitative Easing round 3 to happen at the end of QE2 as fewer buyers will be available to the US. Many countries will look to buy Japanese debt to help them with the rebuilding process. Because the Fed will need to print more money to buy more US Treasuries, more downward pressure will be put on the dollar and encourage the IMF and the rest of the world to support the SDR as the new world’s reserve currency (which will be horrible for the Dollar).
Hindsight will always prove to be the best measure of what happened and what we could have done, but speculating in order to protect oneself makes sense. Buying gold coins and other precious metals is one of the best ways to hedge your portfolio against a falling dollar, as gold will increase and offset losses in the dollar; this in one reason that gold is so popular right now.
We believe that everyone deserves a properly developed strategy for financial safety.
Lynette Zang
Chief Market Analyst, ITM Trading