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So You Think You Can Debase a Currency

Yesterday I visited the nicest public pool I've ever set trunks in.

The place was airplane hangar-sized. Giant hot tub. Towering waterslides. A float-along river for the kids. All this to be found in a tiny Tokyo suburb, the kind of place even most Japanese have never heard of.

The pool's users can thank the Japanese government. Tokyo knows how to spend.

Following the Japanese crash in the early 1990s, the government spent in an attempt to keep the economy afloat. Between 1990 and 2008, central government debt surged from $2.2 trillion to $8.5 trillion as the feds pumped out cash. Much of this went to public works. Roads, bridges and yes, swimming pools.

This represents a 285% increase in government debt in under 20 years. During the same period, U.S. government debt grew from $2.4 trillion to $5.8 trillion. Well behind at only 140% growth rate.

Japan's public debt is even more staggering viewed as a percentage of GDP. In 1990, Tokyo had spent 45% of GDP. In 2008, total debt ran 165%. By far the highest public debt-to-GDP ratio in the developed world (Greece was a distant second at 105%).

Compare again to America. Between 1990 and 2008, U.S. public debt-to-GDP held steady, ranging between just 35% and 50%.

The Japanese spending spree was epic. The kind of money creation you might assume would ruin (or at least severely dent) the value of the yen.

And yet, during this period of open-spigot spending, the yen actually gained in value against the U.S. dollar. In January 1990, a dollar bought 144 yen. By the end of 2008, one buck was worth just 90 yen.

Today, there's a new big spender on the block. America. Since October 2008, the U.S. government has issued $2.2 trillion in new public debt. Brining America's total public debt to $8 trillion, just shy of Japan's current $8.7 trillion. (Another $4.5 trillion worth of American government debt is held by the government itself. The lion's share purchased by the Federal Old-Age and Survivors Insurance Trust Fund.)

America's spending has raised concerns the value of the dollar will plummet. But the question is: against what?

Japan's record over the past two decades shows the nation can hang with the best when it comes to creating new money. Look at some other comparisons.

Dollar bears often point out that Federal Reserve buying of Treasuries this year has created major inflation in the money supply. And this should weigh on the buck.

True, the Fed bought $300 billion in Treasuries this year. Bringing its total holdings to $775 billion. But the Bank of Japan is not far behind. Japan's central bank owns $630 billion in government bonds. Keeping pace with American monetization.

Of course, the Fed has created money other ways. Most notably by issuing cash in exchange for mortgage-backed securities (MBS) owned by banks and other investors. In 2009, the Fed bought $910 billion worth of MBS.

But the Bank of Japan plays this game too. Issuing cash to banks against collateral such as government bonds, commercial paper and even corporate bonds. The BOJ has picked up its lending campaign this year. Essentially bailing banks out of losing bond positions by simply swapping devalued paper for fresh cash. All told, the Bank has issued $1.2 trillion in loans against bonds.

Across the board, the Japanese keep pace with American money creation. Whatever you can do, we can do better.

Wise to bet the dollar will fall significantly against the yen?

Here's to a good swim,

By. Dave Forest of Notela Resources

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