Why Japan is Preparing To Crash the US economy

Why Japan is Preparing To Crash the US economy

Japan holds $1.1 trillion dollars of US debt and if they ever decide to sell that debt, it will cause a massive crash in the United States. And the prime minister of Japan recently hinted that he does not rules out that option. But the real question is that how did Japan end up owning so much of US debt? I mean, if you look at the countries that own US debt, you will see Japan at the top of the list with $1.1 trillion. And what makes this so strange is that Japan’s economy has been stagnating for the last 30 years. Since 1995, the Japanese economy hasn’t been growing. In fact, the economy has been shrinking since then. So, if Japan does not have the money to grow their own economy, where did they get $1.1 trillion of pure cash and simply gave it away to the United States and made the United States wealthier? Why didn’t they take that money and grow their own economy so that their economy would not be stagnating and will finally the Japanese economy will grow and will become the fastest growing economy like it has been back in 1990s? Now to answer that question we have to understand the nature of the Japanese economy. You see after World War II the Japanese economy became the fastest growing economy in the world. The average Japanese was the wealthiest citizen of any other country and at certain points they almost overtook the United States as the world’s largest economy. But then it turned into a bubble and everything collapsed. And as you can see at the GDP figures, the Japanese economy began stagnating. Unlike any other economy, the government quickly interveneed and lowered down interest rates. That’s what happens in the United States when the US goes through a financial crisis. After the 2008 financial crisis, the Federal Reserve lowered down interest rates to drop down the cost of borrowing money so that people borrow money, they start spending and the economy starts growing yet again. The Japanese economy tried to do the exact same thing. So they lowered down the interest rates to.5%. In fact, interest rates since then have been so down that at some point they even lowered them down to.5%. But this created a very strange scenario on the global economy. On one side, you have the world’s second largest economy that have almost 0% interest rate. On the other side, you have the United States, which was the world’s largest economy at that time. But interest rates in the United States were much higher at 5.5%. In fact, since then, yes, there were periods where the United States has experienced low interest rates, such as 2020 and 2021 or after the 2008 financial crisis up until 2015. But other than that, the United States had very high interest rates. And when you look at the treasurables of the United States and you compare them to the rates that the Federal Reserve provides, they’re pretty much very close to one another because the United States government often borrows from the Federal Reserve as well. So if you look at the 1997, the US Treasury bills were at almost 7% interest rates. Well, you could borrow money in Japan at 5% interest rate. That seems like the best business model somebody can create. You don’t have to build anything. you don’t have to build a business. And that created a very strange economic glitch in the entire global economy. It doesn’t sounds real, but in reality, you could literally just go to Japan and borrow money at 0.5% interest rate and simply give it to the United States government and the US government will provide you with 5 to 7% rate of return on your treasury bills. Because on the one side you have the United States that always wants to borrow extra money to start wars, build infrastructure, grow the military industrial complex. On the other side you have the Japanese economy for some reason that have 0% interest rate. So the Japanese companies in Japan were very had a very strange choice to make back in 1990s and early 2000s and even in 2010s. They’re like what do we do with our business? On one side, our economy is stagnating. On the other side, we want to make money. So, they came up with a very brilliant plan. So, you have a pension fund, for example, in Japan. How does a pension fund makes money? Usually, pension funds are required to invest in the safest investments possible because you’re a pension fund and you have to keep providing pensions to the people of your country. Especially when you are in Japan, you can’t suddenly say to the Japanese people who’ve been tax who’ve been paying taxes their entire life suddenly that you know what, we don’t have the money. We lost your money. So they have to invest that money in a very safe investment. And now they could be borrowing money from the Bank of Japan at.5% interest rate and then they will take the exact same money and they will just give it to the United States government at 7% interest rate. And without doing absolutely anything, the pension fund in Japan is making hundreds of billions of dollars out of nothing. What did the pension fund in Japan did? Nothing. They simply borrowed money from Bank of Japan and gave it to the US government. You see this transaction cannot be made directly between the Bank of Japan and the US government. But it is possible when there is an intermediary that is independent from the Bank of Japan and is independent from the government of Japan and at the same time does not belongs to the government of the United States. Now other corporations such as insurance companies who are also mainly investing in very safe investments. saw this opportunity. So they literally just went to the bank of Japan and asked for trillions of dollars or I would say billions of dollars in this case. They took that money, gave it to the US government and started receiving 7% interest rate. The corporations in Japan suddenly saw this opportunity and they’re like why would we start building new cars? Why would we start building new technologies where we can literally make money out of thin air by borrowing money from the Bank of Japan and give it to the United States government? And this was the business model, the corporations, the investment funds, the pension funds, all of them borrowing money from the Bank of Japan and giving it to the United States. And that’s how Japan ended up as the largest investor in the US debt. Not because Japan did not want to grow their own economy, but they found themselves in a very weird position over the last 30 years. That simply borrowing money from the Bank of Japan and giving into the US government was a much more profitable business than doing anything else. I’m not saying that the Japanese economies or the Japanese companies did not do anything, but I’m saying that this was a golden opportunity that everybody in Japan took advantage of. And that’s how Japan ended up owning $1.1 trillion dollars of the US Treasury bills. And the problem is that this strategy that is commonly known as car trade is in danger. And it seems like from now onwards it’s not going to work because if the Japanese economy suddenly starts growing, then this strategy would not work because the Bank of Japan will have to raise the interest rates which will make this strategy impossible. Let’s look at what’s happening with Japan. If you look at the inflation rate in Japan since 1995, you will see a very clear trend. That inflation in Japan was negative, which means that it’s a deflation, which means that prices are going down. So if you have a house, for example, every year the price of your house isn’t rising, it is going down. And that deflationary mindset stayed in Japan for the last 30 years. And that’s why if you look at the GDP of Japan 30 years ago, it was like almost $6 trillion. The GDP of Japan today $4.2 trillion. Why did it shrink? Because when there is deflation, when prices are going down, there is less economic activity in financial terms. So the overall economy shrunk since then. But if you pay a very close attention, you will see finally there is a very clear inflation happening since 2022. Inflation first was 2.5%, then it rose to 3.27%. This year it’s expected to be about 1.7% and based on all the data that we have, it seems like inflation in Japan will continue at around 2% over the next few years. And that means that the Japanese economy starts growing. And that means that the Bank of Japan might have to slightly increase the interest rates in order to make sure that Japan will not experience very high inflation. Deflation is really bad, but high inflation is also very bad. You want to have a very modest inflation of 2% where prices are increasing slightly but not too fast. so that people start buying stuff and they wouldn’t wait until prices keep falling but at the same time prices are not rising too fast so that they can actually manage their savings they can manage their finances and that’s why you see that the bank of Japan has already increased the interest rate from negative percentages to 5%. Now.5% is absolutely nothing if you compare it to what’s happening for example with the Federal Reserve where the interest rates are 4.5%. But again we’re talking about Japan a country that had deflation for the last 30 years. So even this increase of 6% over the last 2 years is significant and as inflation keeps rising the Bank of Japan might actually need to further increase that interest rates to 1% maybe 1.5%. And that is why if you look at 30-year Japanese bonds you see that they have been rising dramatically and right now they offer 3.1% in interest rate. The more Japanese government bonds provide higher rate, the more risk it presents to the United States because if you’re a Japanese company, let’s say you’re a Japanese pension fund or an insurance companies and you’re investing in the US debt and suddenly you see that Japan is providing as much interest rate as the United States. Where are you most likely to invest your money? of course you will invest it in Japan because by investing in the United States there is another risk and that’s the risk of exchange rate because if the exchange rate is not going to be in your favor then you’re most likely to lose that money and if you’re a huge pension fund or if you are an insurance company you cannot possibly risk your money to lose it because of an exchange rate especially when exchange rates are extremely volatile you want to invest your money in a very safe investment so all these companies already invest in Japanese government bonds. But as the rate of return on the Japanese bones keep rising, those businesses, those corporations will find it much more attractive to invest back in Japan. So when their yields, when their government bones in the United States will expire, instead of buying the exact same bones and refinance them over there, they will simply take that money, bring it to Japan, and invest in Japanese bonds. Another factor that’s driving that is most likely that risks are rising with the United States. We have a new administration in the United States and this administration is not looking at the Japanese US relationship the same as previous administrations who rule the United States. They’re imposing tariffs on Japan. The relationship between the two countries are deteriorating. And it doesn’t seems like the relationships will be the same again. And that creates a a risk for Japanese corporations. So why not stop why not start selling a bit of their or maybe a lot of your treasurable billables in the US and bring them to Japan, especially now you can get the exact same rates in Japan as well. So the more this number keeps rising, the more likely they will be investing their money back in Japan instead in the United States. Now the real question is that how is that going to impact you and how is that going to impact the US economy? The US debt must consistently be refinanced. If you look at the treasurable bills you will you will see three month treasurable billables or six month treasurable bills or twoear treasurable bills, fiveear treasurable bills and third year treasurable bills. And every time this treasurable bill expires at that date, for example, if the treasurer build was created in 2020 and it’s a 2-year treasurer bill, then in 2024 it expires. If it was, for example, created in 2025, when I’m recording this video, it will expire in 2027. Usually what happens is that the people who are investing in US debt, they will simply buy the exact same treasury when it expires because they want to continue making the exact same return. Again, I told you about those pension funds. I told you about the insurance companies. They’re not willing to constantly find better great investments. It’s me and you who are trying to find really great investments because we want to make much higher than that because we’re looking to build real wealth. But those corporations they take money from taxpayers like they get hundreds of billions of dollars from taxpayers. Their first priority is safety and then rate of return. And that’s why when these treasurable bills expire and the US government is refinancing the debt, the exact same corporations who bought the first treasure bills will buy the new treasurable bills. But in this case, if Japanese corporations will find it much more attractive to take that money and buy treasurable bills in Japan instead of the United States because they offer the exact same rate of return or very close to that and risks are much lower with Japan, they will not refinance them or they will not buy them again, which means that now the United States will have to find new investors for those treasures. And we’re not talking about a billion dollars or $10 billion. We’re talking about $1.1 trillion. And that means that there will be lower demand for treasury bills of the US government. And when there is lower demand, it doesn’t mean that the entire market is going to crash because we are talking about the largest bone market in the world. That basically means that the US government will have to offer a higher interest rate or a higher return on those treasury bills to attract new investors. If they offer the exact same treasury bills for a higher rate of return to the exact same Japanese investors, they might actually find it much more profitable to keep investing in the United States. But there is a risk when you offer a higher interest rate on the treasurable bills. First of all, it is going to have a huge burden on the US budget. The more interest rates you offer, the more interest payments you are going to make. And where these payments are going to come from? From the US budget. The government of the United States is already running a $2 trillion deficit. And a trillion dollars of that is directly going into paying the interest on the US national debt. And if you raise the cost of servicing that debt, then that number is going to increase. $1.5 trillion, $2 trillion, who knows? But the biggest problem for you is that when the treasurable bills or the rate on the treasur bills are going to rise, that is going to increase the rate on mortgage back securities. Mortgage back securities are the second best investments in the United States debt. First of all, it’s the treasurable bills. Then it’s followed by mortgage back securities because mortgage back securities are being backed by the real estate or the housing market of the United States. When the rate on the mortgage back securities are going to rise, then the mortgage rates on 30-year mortgages are also going to rise because the banks will have to offer a higher mortgage rate so that they can sell this mortgage back securities to corporations who bundle them together and then sell them to investors. Which is why if Japanese corporations are no longer will be buying as much US treasurables as they did in the last 30 years, there is a very good chance that mortgage rates are going to keep rising in the United States simply because there isn’t going to be a strong demand for them and you have to offer a higher interest rates to sell this mortgage back securities. It’s very interesting how the market works that one thing happens on one side of the market can directly impact everyone else on the other side of the market. But if you’re smart about and you know how to manage your money and you know how the market works and you know which asset you should be investing in, it is not going to impact you. But rather you can actually take advantage out of it because exactly just like it impacts your mortgage rates, it is also going to impact the stock market. How? You can find that out by checking the first link in the description of this video. That’s it for today. Thanks guys for watching and I will see you in the next

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