SOS Collapsing Dollar

In 1985, the Japanese Yen traded between 250 to 300 yen per US dollar. When they enter the crisis in 1989, most people believe that yen will become banana money when the government started printing like crazy to bailout, to stimulate, to rebuild, to do all sort of things.

After much of the printing, today, Japanese government debt is 200% its GDP. And guess, what is yen today against US dollar, it is 81. How the heck when bubbles collapse in Japan (property and stocks), and with the crazy printing of money by the Japanese yen, from 1990 to 2010, and yet the yen appreciate.

Of course, one argument would be Japanese has huge trade surplus during the last 20 years (arising from its export).

The question one would ask is, how did the yen appreciate when the government is printing and bailing out all the zombie banks in Japan? Of course, this does to tell us that going forward yen would depreciate (for reconstruction of the Japan arising from the tsunami). Of course, between 1990 to 2010, yen was fluctuating between 85 to 145, but still it is higher than the post 1990.

What if you put the Japan scenerio into USA today. Can US dollar collapse (in medium and long term) because of the money printing just like Japan? Bear in mind, USD government debt over their GDP is a lot lower than Japan.

MyView

Actually this is the issue of printing of money and implosion of debt (which will decide inflation and deflation). If the rate of printing of money is far greater speed than the implosion of debt, then inflation will occur. On the other hand, if the implosion of debt (credit shrink and debt turn bad) is far greater than the printing of money, then a deflation will occur first, before inflation can happen.

However, before time will tell us the story, the investors/speculators (crowds) will perceive whichever way they like, hence causing an extreme volatile movements in the financial markets, such as stocks, commodities, and other financial papers (perhaps just like Japan, the yen fluctuate between 85 to 145 after the crash)

If the USA play out like Japan, where the debt implosion seems to cause Japan in a delation and depression mood for the last 20 years, then, US dollar will appreciate in medium and longer term. But before it happen, the market will be volatile, as the market emotion will set the volatility. However, if we look at it from a credit creation perspective over the long run, the debt implosion will outpace the money printing, because, the world still have about USD65 trillion of debt yet to turn bad, excluding the world derivatives of another USD600 trillion, where some of it will turn bad. So the debate will goes on and on, inflation vs deflation.

Don't forget, US took 20 years to build up it crazy debt level today, so for the next decade, it is not difficult to assume that debt will shrink, and implosion of "ponzi" debt in the banks.

So, do we think that US dollar will collapse (in the new term, meaning 6 to 12 months?). The collapse is merely a perceptions of all the crowd/investors perceptions. The DEMAND and SUPPLY will eventually tell prevail. So, looks of premium or discount will be discounted in the financial markets. As usual the markets always fool the investors/crowds.

What happen to the Japanese carry trade? Surely, they will reverse one day, which it did. Now, we are talking about US dollar carry trade, surely one day it will reverse, but how soon? That is a timing questions, which fundamental analysis will not be able to measure.