Turning Japanese
Editor's note: In his December 17 column, Alchemy, Mr. Practical explained his reasons for moving to Japan and changing his dollar-denominated assets into yen-denominated assets. Unsurprisingly, the article fueled a compelling community discourse on The Exchange. Some highlights of that discussion have been reposted here.
Minyan Steve: Why did you need to move to Japan to convert all of your dollar-denominated assets to yen-denominated assets? You could do the same while living in America. If you moved to Japan because you would rather live there, it is a different story, but not the reason you give.
Mr. Practical: My friend, you should read some of [Federal Reserve Chairman Ben] Bernanke's papers. One solution the Fed came up with in case of dollar collapse is a 2-tiered currency system where dollars in the US cannot go outside and dollars outside cannot come in. I am not saying this will happen, but it has been penned by the Federal Reserve, so cannot be ignored.
Minyan Sam: I'm just an ordinary person out here and I would like an explanation as to why everyone seems to think that the Japanese yen is “the” currency to be in. I certainly understand the mess the US is in, but how much better off is Japan? From what I’ve read, Japan has still not recovered from their debt orgy 10 or so years ago. Didn't they do the same thing that the Fed is doing now to prevent the failure of their financial system? Japan has a problem with their aging population as well, and they are far more dependent on commodity imports than we are. So my question is, why is being invested in the yen perceived as being the best way to protect the value of your money if it is now denominated in dollars?
Mr. Practical: Very simple. Japan has the highest level of savings pool relative to private debt. Their public debt is horrendous, but what is happening over time -- and why the yen is appreciating -- is because Japanese savers are bringing those savings back to Japan. When I feel that has been done, the rally in yen should be about over.
Minyan Bacan: This just came from Terry Woo’s post:
The yen dropped against the euro -- and fell from a 13-year high against the dollar -- after Japanese authorities signaled they may intervene in the currency markets for the first time in 4 years. According to Bloomberg, Japanese Finance Minister Shoichi Nakagawa said he's “keenly watching” the foreign-exchange markets, and, while it's not definite, may try to limit the yen's appreciation.
The last time Japan intervened in the currency markets, it sold a record 20.4 trillion in 2003 and 14.8 trillion in 2004.
Nothing like a little government intervention to interfere with your travel plans.
Mr. Practical: There is desire by all central banks to devalue their currency. No surprise. The euro (actually it's the Swiss franc) has been much, much stronger versus the dollar than any major currency over the last week or so. Two possible reasons: [President of the European Central Bank Jean-Claude] Trichet saying he will not cut rates (probably not true) and Europeans are large investors in US. So when the 2-day Fed meeting was rumored to be a dollar talk-down, Europeans may have bolted out of US investments back into the euro fast.
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My humble additions: apply Maslow's pyramid to your finances. Get the basics done first—live within your means, pay off debt and save some money. Why? Because whether the future brings deflation, hyper-inflation or financial flatulation—if an emergency comes and/or you lose your job, you want to have no debt and some savings. Next, when it comes to investing, “know thyself”. The most important thing to investing well is to know your own heart. Are you a gambler or a worry wart; are you self-reliant or do you always rely on the (professional) kindness of others? Can you stand to see your retirement assets fluctuate wildly, or will you join the sheep at the wrong times as they swarm in and out of the door? Can you stand to see you investments in a low cost index or bond fund, or will you jump in at the wrong moment because you want to control the asset mix down to the choice of each stock and the exact number of shares? Are you addicted to trading, and need some moderation? Once you figure out who you are then you can learn to invest consistent with that, to be “in your skin” as the French say, and then study and become a more skilled investor.
Thank you. Bill
Inflation or deflation
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12-17-2008, 5:01 pm
Part of the answer is simply time frame. If the central bank survives the deflationary depression intact - a big IF - then there will most certainly be an inflation problem on the other side. But that's not a 2009 or 2010 issue, maybe not even 2011 issue. It must be understood these cycles unfold over periods of years, and are experienced in a non-linear fashion, even though they are discussed in a liner manner (i.e. event A happened, B followed, C occurred next and so on). This is a process, not an event. Deflation does not just happen one day. It is as much a psychological phenomenon as an economic one. Deflationary pressures build over time then begin to seep out in different places with the central bank running to plug these leaks wherever they can. I believe there is a non-trivial probability that the deflationary pressures become so great, and the loss of confidence in the central bank sparks such a severe backlash, that we may wind up with a different monetary authority. But again, we are simply talking about probabilities. Even Prechter, though apparently not Schiff, would admit tha we are discussine a complex, dyanimc system and so the ultimate path of things such as the dollar and the fate of the monetary system are probabilistic, not fully predetermined. I undestand the Schiff view that we are facing a hyperinflationary depression, but I disagree with it, and quite frankly find it impossible to understand why someone who believes that is the outcome would remain both in the United States and at the same time participate as an investor under such dire circumstances. It is possible to survive a deflationary depression with a large chunk of wealth intact. It is impossible to emerge unscathed from a hyperinflationary depression. Any market commentator who chooses to remain in this country under such circumstances is like someone warning everyone the ship is sinking while refusing to leave the vessel. It is nonsensical.
On December 17th at 03:51 PM
SCOTT ZABOLOTZKY wrote:
I just don't understand how so many people who saw where this was going and follow the same (Austrian) school of thought can have such differing opinions on where we're headed. Prechter says one thing (deflation) while Schiff says another (hyper-inflation). What's up?
John
