Why Japan Feels the Need to Print Money

By Bill Bonner


03/16/11 Baltimore, Maryland – More problems. More fixes.

The latest from AP:

NEW YORK (AP) – Stocks fell sharply Tuesday as the nuclear crisis in Japan weighed on global markets.

The stock market dropped at the start of trading on news that dangerous levels of radiation were leaking from a crippled nuclear plant. The plant was damaged in last week’s earthquake and tsunami. Japan, the world’s third-largest economy, accounts for 10 percent of US exports.

Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners, said fear had taken hold in the market.

“It’s a situation where you sell, and you ask questions later,” he said.

After falling as much as 297 points, the Dow recovered and ended the day down 137.74, or 1.1 percent, to close at 11,885.42.

Investors sought the relative safety of US Treasurys, sending prices higher and yields lower. The yield on the 10-year Treasury note dropped as low as 3.20 percent in overnight trading. That’s the lowest yield on the 10-year note this year.

Treasury prices soared as stocks plunged during the financial crisis.

What is especially interesting is that in a pinch…Treasurys went up. Gold went down; it lost more than $30, to close under $1,400.

So what gives? Revolutions and civil war in the oil-producing countries. Earthquakes, tidal waves, and nuclear blow-ups in one of the world’s leading oil importers. Problems. Problems. Problems.

The feds called out all available hands. Over in Japan, they injected another 21 trillion yen into their economy. You understand why, of course. You don’t?

Well, let us explain it. The east coast of Japan got smacked by an earthquake and tidal wave, see? And this caused 10,000 deaths…and hundreds of billions worth of property damage, see?

So, naturally, the central bank is printing up more money and distributing it through every channel available to it.

What good does more paper money do? You still don’t see the connection, do you?

Well, neither do we, really. The idea of adding paper money is to “stimulate” people to buy, invest and spend. But you’d think the Japanese would have plenty of incentive already. Their towns, roads, cars, pipes, businesses, houses and harbors were destroyed. They have to rebuild.

And they’ve been champion savers for many, many years; so they must have plenty of money saved, ready for an occasion like this. They were saving for a rainy day; they got a flood.

But what’s that you say? The money was put into Japanese government bonds.

Okay… Well, just sell some of the bonds…

No? That won’t work? You say, the money isn’t there? You say, the Japanese government spent it? And now they’ll have to borrow more in order to pay off bondholders? And so, if the Japanese sell their bonds, it’ll make the bonds go down…yields will go up…bond prices will fall…and the higher interest rates will stifle the reconstruction? And that’s why they have to put more money into the system! Once you start fixing…it’s hard to stop. You’ve got to add more fixes to keep the past fixes from coming un-fixed.

What the he…?

What good are savings if you can’t pull them out and use them when you need them?

And what good is the safety of US Treasury bonds now…if the money won’t be available when it rains?

The feds in the USA have been putting an extra $4 billion per day into the US economy since last November. Why are stocks up? Why did oil go back over $100? Why did grain prices hit record highs? Hey, the money has to go somewhere!

But the program – QE2 – is set to expire in June. Then, the economy that has gotten used to $4 billion per day will have to do without.

And it wouldn’t be too surprising – given all the excitement in the world today – if the Feds decided that they too needed to add more money, rather than take some away.

Bill Bonner
for The Daily Reckoning

Read more: Why Japan Feels the Need to Print Money