The United States and Canada today (Friday) joined other Group of Seven (G-7) nations to intervene as a means of weakening the Japanese yen in an effort to help Japan deal with last week's catastrophic earthquake and tsunami.
This G-7 intervention is a substantial development, although there are precious few details, since none of the world's central bankers (a list that includes the U.S. Federal Reserve) have commented on exactly what "intervention" entails. Nor have they identified what currencies will be involved.
I believe the G-7 leaders are underestimating the implications of their actions. For starters, there will be Japanese banking failures – caused by the simple fact that huge numbers of people who lost everything and weren't insured (and whose places of employment may have been washed away, as well) won't be able to pay their mortgages, their credit card bills, or their car payments.
There will also be a group of folks who simply won't pay – with a backdrop of uncertainty of this magnitude, they either want, or need, to hold onto every single yen they can in order to survive. I cannot fault them one bit.
Such realities almost certainly will result in Japanese banks writing down or writing off segments of their loan portfolios, either this year or next (at the very latest).
In other words, I'm predicting a Japanese banking crisis – something the central bankers aren't even contemplating right now.
I also believe the very fact that the G-7 had to step in (presumably because the Japanese government, with debt already at 225% of gross domestic product (GDP) before the earthquake, couldn't pull it off alone) means things are much worse (in terms of the world's financial system) than we are being led to believe.
The bottom line: Japan's financial system may crash when the capital inflows that everybody (including the G-7) is now counting on stop – as they ultimately have to. History shows that interventions can only last for so long.
Doubling losses in the Japanese markets from here is not inconceivable and investors must be prepared for that possibility.
Needless to say, that kind of scenario has major implications for global markets, including our own – the most likely of which is a dawning realization that central bankers cannot manipulate currencies and economies the way you turn a thermostat up or down to control the temperature in your home.
By intervening repeatedly – as they have throughout our own financial crisis, throughout the European Union's banking disaster, and now in post-quake Japan – those central bankers are solving short-term problems, to be sure. However, by removing risk and failure from the marketplace, they are also perpetuating the illusion that they are in control.
If there is ever a situation where I hope I am wrong, this is it.
Here's the rub … I do not believe that politicians anywhere in the world understand this, which is why their collective strategy of postponement is being conducted in the hope that time will cure all and eventually bail them out.
The only effective discipline will be defaults, as lenders are held accountable for the speculative madness they have engendered. And the only question is when.
In the meantime, there are plenty of opportunities for those investors willing to take a hardnosed look at the world today … warts and all.
News and Related Story Links:
- Money Morning Japan Disaster Coverage:
Disaster in Japan: How Bad Will it Get?
G-7 intervening to halt yen's post-quake rise.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.