Remember the LORD for it is he who gives you the ability to produce wealth and so confirms his covenant... Deut. 8:18

Saturday, March 7, 2009

Ready for World's Biggest Bankruptcy

Of the major industrial economies in the world, Japan's government is the most indebted. Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. As a result, the Japanese government has built up the world's most crippling debt load.The government of Japan owes $7.8 trillion. That's $157,000 per capita.

We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.

If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year.Japan has an aging population and no immigration. I can't see where it's going to find the money to pay off its huge pile of debt.

The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world's most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world's best performing currency.... Rising 33% against the Canadian dollar, 40% against the British pound, and 19% against the dollar.

The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started... and it will end in the bankruptcy of Japan's government. FXY is the ETF for the Japanese yen. When then yen falls, this fund falls, too. The easiest way to bet on a fall in yen is to short this fund or buy put options on it.
By Tom Dyson

1 comment:

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