While everything appears calm for the moment (at least, as I write this article), know this - it's not. What took place last week is only the beginning of a much larger financial crisis, and it's going to get far worse before it ends. The only question now is how quickly will it all unfold? A growing crisis is inevitable, and the reason is simple...
The Bank of Japan is trapped.
Back in May, I wrote "6 Potential Triggers for the Next Global Financial Crisis." The second trigger listed was a Japanese currency crisis:
"Meanwhile, the world's fourth largest economy is on the verge of a major currency crisis. The Japanese yen currently sits at its lowest level relative to the U.S. dollar since 1990. To prevent the situation from getting worse will likely require the Bank of Japan to raise interest rates or the U.S. Federal Reserve to lower interest rates. Given the recent persistence of inflation, it's unlikely we'll see the U.S. lower rates in the short-term (absent a major financial crisis). This means the Bank of Japan may be forced to raise rates and take other measures to defend its currency.
But this will cause a number of problems. First, the Japanese economy is in recession. Raising rates will only make the problem worse. Second, Japanese government debt stands at over 260% of GDP. Believe it or not, that's twice as bad as the United States.
Raising rates means more interest on the national debt, potentially sparking a debt spiral that could destroy the country. Furthermore, if the Bank of Japan starts hiking rates, this could cause a reversal of the yen carry trade (succinctly explained here), which could quickly lead to a disorderly unraveling of financial positions all over the world. Along the way, we could see margin calls and exploding derivatives positions that crash global financial markets." READ MORE
