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This Major World Currency Is About to Plummet

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, March 18, 2009

"I had no place to stay and I wanted the police to take care of me," said the 79-year-old Japanese woman. She had just slashed two people with a knife so the police would take her to jail. 

A "gray" crime wave is sweeping Japan. According to the UK's Independent, people over 65 years old make up 10% of Japan's prison population, the highest rate of incarceration for pensioners in the industrialized world. Another source reported Japanese pensioners were responsible for one in seven arrests last year, up from one in 25 a decade ago.

The surge in "senior crime" is so dramatic, the Japanese government recently earmarked $80 million to build special wards at three prisons to accommodate the elderly. They are fitting these prison wards with metal walkers and support rails. 

Japan has the second-lowest birth rate in the industrialized world. The birth rate to sustain a population is 2.1 per woman. In Japan, the birthrate has fallen below 1.2. Japan's population fell for the first year in 2005. By 2050, if trends continue, Japan's population will fall by 20%.

The other problem is life expectancy. It's going up in Japan. So the elderly are becoming the largest segment of Japan's population. Right now, 20% of Japan's population is over 65 years old. By 2050, 40% of Japan's population will be over 65 years old. In the U.S., the "65 and up" population makes up about 12% of society. 

"Gray" crime is one bi-product of Japan's demographics. Here's another byproduct in the society that ages and shrinks at the same time: It'll bankrupt the Japanese government. 

First, there's a much smaller workforce to pay taxes. The economy shrinks. Businesses pay less tax, too. Second, the elderly consume social security, health care, and pension resources. These are costs to the government. As the senior population rises, these liabilities increase. The elderly don't pay income taxes. 

Since its recession began 20 years ago, Japan's government has plowed trillions into its banking system via numerous bailout programs. In the last six months, for example, Japan's government has authorized three stimulus plans totaling around $100 billion. This month, the Japanese government will give every person in Japan a check for 12,000 yen... about $120... to stimulate the economy. This program will cost the government another $20 billion. And this week, the Japanese prime minister suggested the largest bailout plan yet... putting the Japanese taxpayer on the hook for another $200 billion. 

As a result of all this spending, the Japanese government has built up the world's most crippling debt load and budget deficit. Right now, the government of Japan owes $7.8 trillion to creditors. That's $157,000 per person. This year, it'll have to borrow another $1.1 trillion to make ends meet. 

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%. 

Now Japan's economy is a shambles. For years, the Japanese have relied on exports to support their economy... but exports have dried up. In the last six months, Japan has lost almost a quarter of a trillion dollars from the decline in its exports. In January, Japan's exports plunged 47%... producing a $9 billion trade deficit. This is Japan's first trade deficit in 13 years and its biggest deficit in 25 years. 

When you consider the debt, the bad economy, and the coming population problem, it's clear the Japanese government will never pay off the money it owes.

There are two ways to play the collapse in Japanese government finances. JGBs are 10-year debts of the Japanese government, denominated in yen. The JGB future trades for around $140 right now... and because the yield on JGBs is almost zero (1.2%), it's nearly impossible for these bonds to increase in value. It's a great trade to short these, but you'll need a futures trading account with a company like Interactive Brokers to do it. 

My second idea is much easier: Short the yen. The Japanese yen has been in a 40-year bull market. Now it's beginning a 40-year bear market. FXY is the ETF for the Japanese yen. You should be able to sell it short with any discount broker.

Good investing,


Market Notes


Like a fat guy going for a walk after dessert, platinum is slowly working off the extreme condition we wrote about last month.

To recap, gold and platinum are both precious metals... so they typically trade in a "band" together. One ounce of platinum usually buys two ounces of gold. Right now, that band is stretched to an incredible multiyear extreme. Platinum is super cheap.

Although a lot of platinum is used for "precious" things like jewelry, the auto industry uses about half the world's supply of the metal. When folks saw world car production falling last fall, they dumped platinum and caused a huge price crash. The crash took platinum to an incredible extreme relative to gold. But as you can see from today's chart, platinum is steadily working its way higher.

Can you trade off this situation? Sure... but in Market Notes, we're tracking the performance of platinum vs. gold for another reason. Since most platinum is used in cars and jewelry, it's a lot more of a "hey honey, let's go buy you a new car and some earrings" asset... Gold, on the other hand, is more of a "hey honey, I think stocks, bonds, and real estate are crashing, so let's buy gold and hide in the basement next to the canned food and guns" asset. The higher this ratio climbs, the "less bad" things are getting.

In The Daily Crux

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