Editor’s note: The following is a lightly edited transcript of the accompanying video from professor Peter St. Onge.
Japan is on the verge of a fire sale of hundreds of billions of dollars in U.S. debt that could crash Treasury markets already teetering on the edge.
Just another exciting day for de-dollarization as Japan’s collapse sends people scrounging the couch cushions for dollars to pawn.
The news comes from The Wall Street Journal, which reported that Japan’s state-owned Government Pension Investment Fund, which holds Social Security reserves of nearly every Japanese worker, is poised to sell down its $400 billion of U.S. dollar assets and direct the money to Japanese domestic bonds and equities to prop up Japan’s asset markets long enough to limp through the next crisis.
The numbers are big because Japan actually has a Social Security lockbox—unlike the U.S., where Congress has frittered away every last penny Social Security has even taken in and replaced them with IOUs.
Out of the $1.5 trillion in that lockbox, Japan’s Government Pension Investment Fund owns nearly $400 billion in U.S. Treasurys and another $400 billion in overseas equities—stocks—overwhelmingly parked in S&P 500 companies.
So that’s $800 billion of U.S. dollar-denominated assets.
More important, the government pension influences all the other pensions in Japan, since it’s a quasi-official seal of approval. Those other pensions manage another $1.5 trillion in corporate pensions alone, and a Government Pension Investment Fund allocation would imply that’s another $800 billion in U.S. assets.
The party for Japan’s de-dollarization doesn’t stop at pensions. Just two weeks ago, Japan’s No. 5 bank, Norinchukin, announced it will be selling up to $63 billion in Treasurys to plug holes in its balance sheet from unhedged sovereign bond investments—the same investments that crashed U.S. banks last year.
The even larger Japan Post Bank could face even bigger dollar sell-offs given its get-rich-or-die-trying portfolio including $200 billion in mainly U.S. bonds and $350 billion in “investment trusts” that, once again, are predominantly in U.S. bonds and private equity.
Considering that major banks in Japan also tend to mimic each other, there are probably more dollar fire-sales on the way.
Japan at this point is selling off the furniture to pay the rent.
The government is essentially out of ideas, having plowed Keynesian stimulus to its logical conclusion and achieved nothing but a debt ratio of 264%—the highest in any major country, and equivalent to $70 trillion in U.S. terms.
The one thing Tokyo hasn’t tried, of course, is radically shrinking the government—slashing government spending, slashing small business taxes and regulatory mandates, and getting the central bank out of economic micromanagement.
As for the dollar, if Japan is about to flip to mass seller, that knocks out the single biggest overseas holder of U.S. debt. And at a time when the No. 2 holder, China, is selling dollars hand-over-fist.
And what if there are not enough buyers for U.S. debt?
Easy: Prices crash and interest rates soar. We’d be back to crashing banks here in America, with Washington’s debt service driving toward $2 trillion per year—in interest alone.
Toss in a coming recession, the open border, and funding all the wars Biden’s handlers can drum up, and we could be in for a very bumpy ride.
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