EDITORIAL PAGE — Currency turmoil, inflationary fears seen

At the present rate of progress, it will not be long before the Japanese yen is worth a whole American cent. The reason for the soaring yen is clear: a surplus on the current account of Japan’s balance of payments approaching US$130 billion per year. The U.S., by contrast, has a deficit on its current account of around $US63 billion.

For some years now, the German mark has been the safe-haven currency. But we believe that, as Germany sinks deeper into a serious economic slump and faces increasing socio-economic problems, the era of Deutsche Mark hegemony is over.

The world experienced serious currency turmoil last year as the European exchange rate mechanism started to fragment, and recent devaluations by Spain and Portugal are a clear indication of the continuing strains within the system.

We have argued that the gold price could be going up because of inflationary fears or to discount a major financial accident which causes a run out of paper assets. A continuation in the slide of the dollar would aggravate inflation, but it could also precipitate a financial crisis. The Japanese are major holders of U.S. government bonds. If they believe this is the low point in the U.S. interest rate cycle and that the dollar is likely to fall further against the yen, they may decide to sell U.S. bonds and repatriate their proceeds.

A sell-off in the bond market would not, in itself, normally trigger a crisis, though it would not be welcome, with the economic recovery appearing to falter. (It would certainly inject a dose of reality into the overblown U.S. equity market.)

The real danger, however, is that if the Japanese start a slide in the bond market, U.S. banks, which have invested more than a quarter of their assets in “risk-free” government bonds, may also head for the exit, thus driving prices lower and creating a panic.

Such a possibility has obviously been spotted by Alan Greenspan (head of the Federal Reserve Board in the U.S.), who stepped in recently to prop up the dollar against the yen. We suspect that it is also a reason why some investors are moving out of bonds, equities and currencies and into gold and gold shares.

— Analyst Ian Lamont of Yorkton Securities, writing in a recent “Natural Resources” newsletter prior to the current political excitement in Japan.