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Minyan Mailbag: A Yen for the Yen


In a shrinking world economy, the only thing that matters is who deflates the fastest.

Dear Mr. Practical,

Just curious as to what you think of the yen. Dennis Gartman hates it - and the Japanese economy as a whole. I'm trying to see both sides.

- Minyan Dan

Dear Minyan Dan,

In today's deflationary world, currency movements aren't driven by economic strength.

Notice the dollar's strength. That's not due to the fact that the US economy is growing faster than other economies. It's due to the fact that the dollar has been devalued immensely over the last 5 years (especially) by creating massive debt. When you create debt you create dollars; the more dollars there are the less they are worth. Now the debt is being destroyed (forfeited, paid off) and thus dollars are being destroyed. The fractional banking system that creates dollars is broken. The dollar should remain strong (relative to most currencies) in this case.

It's the same for the yen, but Japan has the added element of having high personal savings. With immense public debt, the Japanese -- who have been the greatest inflationists of all time for the last century -- have no mechanism for inflating (devaluing the yen). As they repatriate those savings, it should further strengthen the yen.

The US has little savings. The yen is the only currency that should be stronger than the dollar.

In a growing world economy, it's the economy that grows the fastest -- and thus doesn't need to print currency -- whose currency is the strongest. In a world economy that's shrinking, those rules don't apply. The only thing that matters is who is deflating fastest.

Mr. P
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