Not only is Japan the world's third largest economy, but also the second largest holder of US debt. Yesterday's flow of funds data indicated that China, the second biggest holder of US debt, cut back on its purchases by 5 percent for the fourth consecutive month. (The Fed is by far the biggest holder of US debt - which means we - the US - issue debt and we - the US - buy that debt).Japan (and China) buy our debt because we borrow (from ourselves by printing money) to buy their goods. Rather than using those dollars to purchase their own currencies (which would send the price of their currencies skyward) they take those dollars and purchase dollar denominated debt.
This keeps their currencies from appreciating too much and this keeps our interest rates from spiraling out of control.
But we will not be buying goods from Japan for the foreseeable future. So they will not need to sterilize these purchases by buying our debt. China is cutting back. The gulf states are having their own problems. And the Caribbean banks are shell operation operated by the Fed. That doesn't leave much.
When this game stops we will be in the difficult position of being the only buyers of our own debt. And since our debt is growing at a 4 billion dollar a day rate - we will have to print 4 billion dollars a day to buy that new debt.
Can you spell H-Y-P-E-R-I-N-F-L-A-T-I-O-N?
Gold may be selling off now - so buy it now as it drops. There may not be another chance.
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