March 24, 2011

Timothy Geithner, the US Treasury Secretary Worries Japan Will Dump US Treasuries To Raise Cash! I Added A Video Related To This Subject: Lou Dobbs Interviews Peter Schiff

The Economic Times
written by Bloomberg staff
Thursday March 17, 2011

TOKYO: A sudden shock to the global financial system has a way of uncovering its true state. As billionaire Warren Buffett famously said, it's only when the tide goes out that you learn who has been swimming naked. Two events since Japan's March 11 earthquake have shown the extent to which our economic reality has no proverbial clothes.

One is that the yen is rising. You would think earthquakes, tsunamis and radiation clouds would have investors actively fleeing yen assets. Not so! On March 14, a Bloomberg News headline proclaimed: "Yen reaches four-month high against dollar on safe-haven demand." Some haven, that Japan. The other is how quickly Timothy Geithner, the US Treasury secretary, got in front of the biggest worry in markets: that Japan will dump its vast holdings of treasuries to raise cash.

This latter one is worth exploring because its implications would travel farther and wider than the radiation leaking from nuclear power plants. It could just happen, roiling world markets like only a Black Swan-event can. Theories for yen demand tread similar ground as the rationale for Japan selling its dollars holdings — just less convincingly. We always need a handy explanation for why something is happening. New reports argue that it's all about insurance companies repatriating funds to pay for quake demand.

Perhaps, yet it's only part of the story. The yen has been irrationally strong since the 2008 collapse of Lehman Brothers Holdings. Even with the nuclear risks, the yen is considered a less risky currency than the dollar and euro. It's not that the yen is attractive. It's that if the currency markets held a beauty contest, the yen would be the least ugly contestant. The same could be said of US debt.

Pacific Investment Management Co's Bill Gross, who runs the world's biggest bond fund, last month dumped government-related debt. Few investors seem willing to do the same. The reason: What else are you going to buy? Greek debt? French debt? Gold? Try to get your hands on some of the 5% of Japanese government bonds that aren't held in Japan? For better, or worse, it's US debt. That is, unless the Japanese move to draw down large chunks of its $886-billion worth.
It could trigger the nightmare chain reaction officials in Washington have dreaded since 2008. China, which holds $1.2 trillion of US debt, might act to avoid even bigger losses. The UK ($278 billion), oil exporters ($216 billion ), Brazil ($198 billion), Caribbean banking centres ($167 billion) might follow suit. So might Asia's other dollars hoarders including Taiwan, Hong Kong, Singapore and Thailand.

If history is any guide, it might not happen. "Based on the 1995 experience of the Great Hanshin earthquake, the risk of selling by Japanese insurance companies would appear to be limited, at least in the near-term," says Ward McCarthy, chief financial economist at Jefferies & Co in New York. Yet the Japan of 2011 isn't the Japan of 1995. Its debt is now twice the size of the economy, leaving far less room to borrow to boost growth than there was 16 years ago.

Also, the Bank of Japan's interest-rate policies are already at zero. The next step would be massive BOJ purchases of Japanese stocks after the Nikkei-225 Stock Average fell 16% in the first two trading days after the earthquake. That would be a slippery financial slope, but desperate times do tend to lead to desperate measures.

That would certainly be the case if Japan decided to start dropping big blocks of treasuries on the market. The turmoil would catch many a government policy maker or investor swimming naked, in the Buffett sense.

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