Wednesday, March 16, 2011

Japan: condolences and caution

First and foremost, it must be said my thoughts and prayers are with the people of Japan. I cannot even begin to imagine what their ordeal must be like – and was like for those whose lives have been lost so far.

Justifiably so, the news and images that have streamed out of the West Pacific have been a source of immense anxiety and sorrow for those who have kept-up with them. We need to give – and give generously.

Unfortunately, there must come a time to begin the distasteful portion of the Japanese story: discussing the economic impacts of the string of massive natural disasters which have taken their toll.

In short, the United States either will face great peril or tremendous opportunity. I do not see much potential for middle ground on this.

The peril stems from the fact Japan currently is the second-largest foreign holder of the United States’ national debt. The Japanese nation presently owns just under $890 billion in U.S. Treasury Bonds.

In the very, very near future, the Land of the Rising Sun’s government will be selling those treasuries in significant chunks as a means to afford the enormous rebuilding effort which must begin there. Another viable option for Japan simply doesn’t exist.

Don’t be surprised to read or watch in the coming weeks (or days) about the Japanese selling U.S. debt in chunks of tens-of-billion-of-dollars at a time. When you consider the U.S. federal government now is running monthly deficits in excess of $220 billion , our picture here at home has the potential to look almost as bleak as Japan’s (I reiterate: almost!).

A run like this on the U.S. dollar in the international currency market creates the potential for interest rates on our national debt to rise sharply, further erode the dollar’s value, and spike inflation rates – all placing even greater pressure on our economy.

The worst-case scenario is if Japan struggles to find buyers and its leadership comes knocking on the doors of the U.S. Treasury insisting upon emolument for anywhere from $100 billion to $200 billion. A cash-out demand of that size could very well put the United States on the brink of defaulting on its debt.

If that happens, the next big meltdown to hit the headlines will be in Washington.

Averting this disaster will require urgent but very careful negotiating on the part of the Obama Administration’s top economic minds. When you consider the present crew has demonstrated more economic incompetence than the Carter and Bush 43 administrations combined, all I can think of at this point is God help us… God help us all.

The silver lining?

The operative question – now – centers on what the potential “tremendous opportunity” could possibly be.

While the economic news out of Japan at times seems to be changing on an hourly basis, the latest reports I read as of this time of writing state widespread plant closings for that country’s top manufacturers. Toyota has shut down all 12 of its plants there, Honda, Nissan, and Subaru have suspended operations at multiple locations, and Sony has had to initiate closings as well.

The shutdowns have had to do as much with electrical power concerns due to the multiple nuclear reactor crises as with assessing structural damage and other earthquake-related concerns. Some – but not all – timelines for reopening plants remain unclear.

Any long-term closures by Japanese manufacturers inevitably will lead to immense voids in the respective market shares they control. Toyota alone, shutting-down all 12 domestic plants, represents a massive drop-off in the country’s overall exports. Add to the mix Sony – one of the top electronics and entertainment producers in the world – and the cross-section of industries impacted beyond automotive is tremendous.

While this is not how a civilized mind would anticipate an opportunity for a resurgence in America’s manufacturing sector, the fact remains that the unavoidable shortfall in Japan’s ability to meet its present market share for exports means someone must poise themselves to fill those voids.

Here on our shores, government at all levels can greatly aid our own manufacturers by vastly reducing the red tape required to build either new businesses or new locations for present companies.

Otherwise, I have no doubt China, Russia, and India will be more than happy to fill-in the worldwide gaps for us.

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