JAPANESE POLICY OBJECTIVES FOR THE DESTRUCTION OF THE AMERICAN ECONOMY

One of the main techniques for breaking morale through a strategy of terror consists of keeping a person confused as to where he stands, and just what he may reasonably expect. In addition, if frequent vacillations between severe disciplinary measures and promise of good treatment together with the spreading of contradictory news makes the structure of the situation unclear, then the individual may cease to know whether a particular plan would lead toward or away from his goal. Confusion sets in, weakening the enemy.

We must remember that the real forces affecting world economies are NOT found in economic text books. Essentially, traditional text books are logistically flawed - and they do not take into account the forces of greed and power that dwell upon the earth. Understand that the people who seek to dominate and control the world care not for dollars, or yen, or gold, or any particular political system. They will use any and all resources at their disposal to obtain their goal of world domination.

Think and observe. Since 1995 the Japanese Yen has fallen from 85Yen/U.S. dollar to over 140Yen/U.S. dollar. This is despite a large and increasing trade surplus and Japan being the largest net capital provider to the world. Both of these factors SHOULD HAVE CAUSED the value of the Yen to increase, not decrease. Something has produced this anomaly.

Since 1995 investors have been going to Japanese banks and borrowing Yen at 1/2% interest, and then selling the Yen for U.S. dollars to be invested in U.S. bonds at 6% interest. While no one knows the magnitude of these borrowings, some recognised experts estimate that it could total U.S. $1 trillion. In any case, they are large enough to offset the net interest income and large trade surplus of the Japanese exports, thus pressuring the value decline of the Yen from 85 to 140/U.S. dollar. This has been called the Yen-Carry Trade.

Understand what has happened. Out of nothing Japanese banks have created massive amounts of Yen. These Yen have been used to purchase U.S. dollars, and have represented a major money inflow into the U.S. These funds have reduced American interest rates and provided funds to propel the U.S. economy and Wall Street. Low interest rates, improving terms of trade (despite a huge current account deficit), and a growing U.S. economy have led many to call this a "new paradigm." Unfortunately, they DO NOT understand that the source of this pseudo-strength is foreign liquidity created out of nothing.

Despite a seemingly powerful U.S. economy, the effects of the Yen-Carry Trade have led to financial collapse in South-East Asia. With the fall of the Japanese Yen, countries could no longer maintain the link to the U.S. dollar - which precipitated severe financial problems in South-East Asian corporate and banking sectors.

It is also to be recalled that since 1995 the price of gold has fallen from about $400/ounce the $290/ounce range level. This is despite world record demand of the yellow metal - and completely ignores the current major crisis blowing through Asia. The reason for the gold price anomaly is very similar to the Yen-Carry Trade - and is rightly called the Gold-Carry Trade (also referred to as gold loans). Investors have been borrowing vast sums of gold from central banks (at a mere 1-2% interest), consequently selling the gold, and subsequently investing the proceeds in U.S. Treasury Bills - earning 6% interest. A few acclaimed experts estimate that the total amount of gold sold in this manner could now exceed 8,000 tonnes - which represent more than THREE YEARS MINE PRODUCTION WORLDWIDE!

These gold loans have affected the U.S. economy in a similar way to the loans for the Yen-Carry Trade. They have increased the demand for U.S. dollars, causing funds flowing to the U.S. - thus decreasing interest rates and helping to propel the U.S. economy and propelling the stock market to unprecedented levels.

The Yen-Carry Trade and the Gold-Carry Trade are very similar in nature - and both have had a strong boost, albeit artificial, to the U.S. economy. Investors are now focused on the weak Japanese financial system, and feel that as long as the financial system deteriorates, money will continue to flow out of Japan.

Some may correctly comprehend that the problems within Japan's financial structure are so large and onerous that the system will default on its financial obligations. Japan's ONLY alternative remedy for this insurmountable problem is to print so much money that the Yen value will be destroyed. Nonetheless, investors in the Yen-Carry Trade hope to be able to repay their Yen loans by purchasing relatively worthless Yen in the future - which would translate into huge profits.

Like the investors in the Yen-Carry Trade, speculating investors in the Gold-Carry Trade are currently showing large 'paper' profits. However, to crystallise these profits, they must purchase about 8,000 tonnes of gold. In view of the fact gold demand is presently running far in excess of mine supply, the 8,000 gold-short cannot feasibly come from the mines. Speculating investors are relying (indeed wishfully hoping) on central banks to sell gold to cover their SHORT positions. HOWEVER, SHOULD central banks NOT sell gold, there is no identifiable source of gold to cover these SHORT positions - Except, of course, at much higher prices.

Speculating investors who expect central banks to sell them gold would do well to first ascertain the ILLOGIC of why central banks would first lend vast amounts of gold (which drives down the price of gold) prior to selling the gold. (Further commentary on this point is beyond the scope of this report.)

Now consider the options available to the Japanese. The Bank of Japan could sell its vast holdings of U.S. Treasury Bills, and subsequently purchase Yen. This would provide only temporary support for the value of the Yen. However, this would come at the expense of the loss of foreign reserves.

Certainly, the Nippon government is cognizant of the fragile posture of its teetering bank system. Furthermore, it is obvious to all that Japan is facing the total collapse of its financial system, reflecting huge bad-debt levels. And although the Japanese have furtively implemented all the traditional text-book economic strategies, the dire financial situation CONTINUES to worsen.

To maintain present conventional policies will inevitably see the economy implode, accompanied by the collapse of the banking sector. To now begin printing Yen as some economists have advocated will destroy the value of the Yen (while guaranteeing huge profits for those involved in the Yen-Carry Trade).

Are there any OTHER policy options available to Japan? If Japan does nothing, or instead decides to print money, it faces total economic collapse - which will represent a major defeat to the Japanese --- representing a major "loss of face" for them. This will be especially embarrassing if the U.S. is concurrently viewed as being strong economically.

Japan's Historic "SUPERIORITY"

Japan has always demonstrated a historical sense of superiority over the rest of the world. Nevertheless, they still harbour the humiliation of having lost World War-ll. And worst, the painful remembrance of the Hiroshima and Nagasaki victims must still echo through the windmills of minds of elderly politicians. Viewed from a political and military reference, if Japan is going to collapse economically, they must ensure that other countries do so also.

The relative strength of the U.S. and China are of particular concern to the Japanese. If the Japanese economy does contract severely, but LESS so than the U.S. and China, then this may be seen as a victory - allowing the Japanese economy to emerge stronger than the future faltering economies of the U.S. and China.

At best, economics is a tool of political and military power. Craig Karpel recently reported in "Strategic Weekly Briefings" that the five recent nuclear tests by India were set off after "Clinton defied a secret ultimatum from Indian Prime Minister Atal Behari Vajpayee that India would take drastic defense related actions if Clinton didn't agree to stop assisting China's nuclear missile program and facilitating China's provision of Pakistan with nuclear weapons technology."

Japan was recently snubbed by Clinton's recent visit to China. Moreover, Japan sees U.S. technology developing China's military power. Therefore, Japan must realise that it cannot allow itself to become weaker, as others become stronger. This begs the question: What can the Japanese do to recapitalize their economy, and concurrently promote weakness in other economies, so as to emerge as the stronger nation?

The Japanese must support and back their currency. Not by insolvent banks and government promises, but by gold. At the same time, they must create a situation where money flows from the rest of the world BACK TO Japan. The Japanese would first of all want to accumulate as much gold as possible, and then drive its value many multiples above the present price. The resulting increase in wealth would assist in recapitalizing their economy. At the same time, the Japanese would cause significant strain on other economies in order to gain political strength, and ultimately military advantage.

First of all, let us consider the gold market. Over the last few years, it is estimated that about 8,000 tonnes of leased gold has been sold into the market. This gold was NOT purchased by the average investor, or by mutual funds. Logically, continual purchase of an asset that pays no interest and is falling in value can only be done by some entity with a long range plan.

The opportunity was there for the Bank of Japan (BOJ) to purchase a considerable amount of gold. Interestingly, there was some evidence of this. During the week of June 8, 1998, it was rumoured that the Japanese had just purchased 400 tonnes of gold. However, regardless of how much gold that the Japanese have purchased to date, if the BOJ were to take the $200 billion (currently invested in U.S. Treasury Bills), and purchase gold, the price of gold would increase substantially from present levels. And once it became apparent that the BOJ was purchasing massive amounts of gold (and was determined to drive its price up), the short sellers of the 8,000 tonnes of leased gold would be forced to cover. Furthermore, other investors seeing gold as a one way bet would jump in - and the price would soar over-night. At the same time Japan would withdraw all of its liquidity from the U.S., either through moral suasion or economic policies. Consequently, all loans to finance the Yen-Carry Trade would necessarily need to be repaid. This could be accomplished through moral suasion (Japanese banks would be simply told that this must be done), via government decree (new laws preventing these loans), or by economic policies such as a major increase in the interest cost of these loans. This would result in a substantial sale of U.S. Treasury Bills, the sale of U.S. dollars, and subsequent purchase of Yen. While the total amount of these loans is not known, they are substantial enough to have a major effect on the U.S. economy and could well approach $1 trillion.

Now consider the forces that would be acting on the U.S.

1. Over the next year, the current account deficit could approach $250 billion, representing an outflow of dollars.
   
   
2. The Japanese government selling U.S. treasury bills and then U.S. dollars totaling $200 billion and purchasing gold would represent a major outflow of dollars.
   
   
3. The Japanese government forcing the repayment of loans for the Yen-Carry Trade would cause first the selling of U.S. Treasury Bills, then U.S. dollars for the purchase of Yen. At present exchange rates, this outflow could approach $1 trillion, but with demand for Yen driving up the price of Yen substantially, the outflow will likely far exceed $1 trillion.
   
   
4. The actions of the Japanese government to drive up the price of gold will FORCE the gold loans to be unwound. Speculator investors in these loans will be selling U.S. Treasury Bills and then U.S. dollars and purchasing gold, further increasing the outflow of U.S. dollars.
   
   

The combination of the U.S. current account deficit and the above action by the Japanese government would see an outflow exceeding $1.5 trillion out of the U.S. economy in a very short time.

Consequently, the U.S. dollar would plummet in value and gold would sky-rocket.

This assumes that other investors do nothing. However, the Japanese government action will undoubtedly prompt other international investors to act in a similar manner - likely resulting in an outflow (from the U.S.) being a multiple of $1.5 trillion. These actions will collapse a vastly over-inflated Wall Street. Logically, other global investors would have no choice but to sell their U.S. assets (which are now falling in value) and subsequently purchase gold (which is now rising in value).

This hypothetical scenario would cause the U.S. economy to demonstrate:

1. A major trade deficit
   
   
2. A massive investment outflow
   
   
3. Rising interest rates (due to massive sales of U.S. Treasury Bills and rising inflation (due to the drop of the U.S. dollar)
   
   
4. A consumer sector which has just increased its debt load by 50% over the last four years, and now has lost most of its wealth in a stock crash.
   
   

The above scenario is hypothetical, but could be triggered by Japan at any time. In light of Japan's rapidly deteriorating condition, it is indeed imperative to appreciate the Nippons have everything to gain… and very precious little to lose.

The benefits to the Japanese economy are uncertain, but most assuredly would be no worse off than under present policies. In essence any draconian measure is worth risking in the hope the dire situation will improve. A drowning man grasps any straw… The Nippons have everything to gain, AND NOTHING TO LOSE! In any case, the political and military benefits would be huge - which may will help forge the ultimate decision.

The above analysis does NOT take into account the emerging Euro, the impact of the new European Central Bank (ECB) and their interaction in the above events.

It now appears that the ECB will control all foreign exchange reserves including gold of the 11 member countries. This makes the ECB potentially the most powerful financial force in the world. Its combined holdings of gold and foreign exchange are much greater than those of the Japanese or Americans, and will be controlled by a single central force. The ECB may also decide that the hundreds of billions of U.S. Treasury Bills that it controls are surplus to its needs… and summarily dump same. Indubitably, this action would guarantee the success of the Euro.

Currency movements are more and more becoming disconnected from economic fundamentals (which are driven by investment flows). FOREX MOVEMENTS will eventually have very serious effects on the world economy, precipitating in a major crash of all major paper assets. This will lead to calls for a new way of controlling the world economic system, a New World Order.

John Kutyn
16 July 1998