The yen may be falling, but it's a dollar crisis
When the yen briefly soared to 81 against the US dollar in early 1995 everyone spoke of it as a dollar crisis.
Now with the yen tumbling against the US dollar everyone speaks of it as a yen crisis.
The reverse is actually true. It was a yen crisis in 1995 and a dollar crisis now.
The strength of the yen in 1995 exposed weaknesses in the Japanese economy which have come home to roost. Similarly, the general strength of the US dollar against almost all currencies at the moment is exposing weaknesses in the US economy which will soon come home to roost as well.
The three charts below tell some of the story. The first chart shows that private personal savings in the US are plunging so fast as almost to disprove Galileo's famous demonstration that a big cannonball drops as fast as a small one. Nothing could fall as fast as this big one.
One reason it is happening is that, lulled by the financial hubris which now afflicts the country, almost everyone in the US seems to be realising at least some profit on their investments and using the money to buy cars, homes, stereos and other forms of consumer goods.
And because the US is no longer the world's big producer of consumer rubbish, this means buying it from abroad. As a result the only thing to challenge the plunge in US personal savings is the growth of the trade deficit. As the second chart shows, it now runs at more than US$21 billion a month and has grown this year at a speed rarely, if ever, seen before.
The strength of the US dollar will now make it all the more difficult for American industry to compete effectively in world markets and so reverse the trade deficit, particularly if the American public continues to show itself reluctant to invest in that industry.
As long as foreigners are willing to fill this hole with investment capital sent to the US it will cause no immediate problems.
But the Asian experience of what happens when foreign capital is no longer sufficient to counterbalance big trade deficits rings a warning bell for the US.
It is highly unusual, to say the least, that a precipitous decline in personal savings and a ballooning trade deficit should coincide with record-low interest rates. Who would ever have forecast that the long bond yield would drop to 5.56 per cent in this environment? Yet it has.
Fundamental forces cannot have much immediate effect when currency markets are so dominated by speculators as to make currency trading for real trade and investment purposes insignificant.
Hidden as it yet may be, it's a dollar crisis nonetheless.