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Why Japan Feels the Need to Print Money

More problems. More fixes.

The latest from AP:

NEW YORK (AP) – Stocks fell sharply Tuesday as the nuclear crisis in Japan weighed on global markets.

The stock market dropped at the start of trading on news that dangerous levels of radiation were leaking from a crippled nuclear plant. The plant was damaged in last week’s earthquake and tsunami. Japan, the world’s third-largest economy, accounts for 10 percent of US exports.

Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners, said fear had taken hold in the market.

“It’s a situation where you sell, and you ask questions later,” he said.

After falling as much as 297 points, the Dow recovered and ended the day down 137.74, or 1.1 percent, to close at 11,885.42.

Investors sought the relative safety of US Treasurys, sending prices higher and yields lower. The yield on the 10-year Treasury note dropped as low as 3.20 percent in overnight trading. That’s the lowest yield on the 10-year note this year.

Treasury prices soared as stocks plunged during the financial crisis.

What is especially interesting is that in a pinch…Treasurys went up. Gold went down; it lost more than $30, to close under $1,400.

So what gives? Revolutions and civil war in the oil-producing countries. Earthquakes, tidal waves, and nuclear blow-ups in one of the world’s leading oil importers. Problems. Problems. Problems.

The feds called out all available hands. Over in Japan, they injected another 21 trillion yen into their economy. You understand why, of course. You don’t?

Well, let us explain it. The east coast of Japan got smacked by an earthquake and tidal wave, see? And this caused 10,000 deaths…and hundreds of billions worth of property damage, see?

So, naturally, the central bank is printing up more money and distributing it through every channel available to it.

What good does more paper money do? You still don’t see the connection, do you?

Well, neither do we, really. The idea of adding paper money is to “stimulate” people to buy, invest and spend. But you’d think the Japanese would have plenty of incentive already. Their towns, roads, cars, pipes, businesses, houses and harbors were destroyed. They have to rebuild.

And they’ve been champion savers for many, many years; so they must have plenty of money saved, ready for an occasion like this. They were saving for a rainy day; they got a flood.

But what’s that you say? The money was put into Japanese government bonds.

Okay… Well, just sell some of the bonds…

No? That won’t work? You say, the money isn’t there? You say, the Japanese government spent it? And now they’ll have to borrow more in order to pay off bondholders? And so, if the Japanese sell their bonds, it’ll make the bonds go down…yields will go up…bond prices will fall…and the higher interest rates will stifle the reconstruction? And that’s why they have to put more money into the system! Once you start fixing…it’s hard to stop. You’ve got to add more fixes to keep the past fixes from coming un-fixed.

What the he…?

What good are savings if you can’t pull them out and use them when you need them?

And what good is the safety of US Treasury bonds now…if the money won’t be available when it rains?

The feds in the USA have been putting an extra $4 billion per day into the US economy since last November. Why are stocks up? Why did oil go back over $100? Why did grain prices hit record highs? Hey, the money has to go somewhere!

But the program – QE2 – is set to expire in June. Then, the economy that has gotten used to $4 billion per day will have to do without.

And it wouldn’t be too surprising – given all the excitement in the world today – if the Feds decided that they too needed to add more money, rather than take some away.

And more thoughts…

“…little electricity or gasoline…” reports an eyewitness from The Washington Post, visiting Sendai, Japan. “Nearly all restaurants and shops are closed…roads blocked…supplies depleted…the devastation is catastrophic.”

“Fuel almost non-existent…survivors will spend a fourth night in near freezing temperatures without food or water…”

We were elaborating on the benefits of having a family stronghold…a retreat…a bolt hole somewhere. When the going gets tough, you need a tough place to go to.

Oh yes…dear reader…the world is a dangerous place. Just so far this year, we’ve seen two big blow-ups – one in the Arab countries…the other in Japan.

Neither was expected. What’s next?

Obviously, we don’t know. If it’s a big, nasty surprise, we hope we’re not here in Bethesda, Maryland, when it comes.

Why? Because the supermarkets would be cleaned out in minutes…the gas stations would run dry…and we’d be trapped in a hostile environment. We’re only here temporarily, while our youngest son finishes high school nearby. We have no family. Few friends. And none of the deep roots you need to survive a prolonged period of crisis and breakdown. Here, we are just anonymous passers-by… We would have to depend on the kindness of strangers and the competence of government officials.

What do you need to survive a disaster? First, you need access to water. As we’ve seen in Japan, even the most developed and sophisticated infrastructure in the world can collapse when it is struck by an earthquake and a tsunami. Public water pipes break. It can take weeks or months to replace them – assuming the government and local utilities are still functioning.

That’s why it’s a good idea to have your own private source of water – a spring, a well, a small, clean stream. Failing that, you should have enough water stocked up to last at least a couple weeks.

Then, you need to worry about food. How long could you live on what is in your refrigerator? We could make it for about 24 hours. Then, it would be slim pickings. And what if the supermarket were closed? What if the 7-11 were stripped bare? What if trucks couldn’t make deliveries?

Well, surely the president would call out the National Guard. Yes, if everything is working as it should…and the National Guard doesn’t have more important things to worry about.

Just as a precaution, you should maintain a stock of canned goods and dried food. Enough to last two weeks is the minimum. A month is better. Then, rotate your stock – don’t leave it untouched for so long it goes bad.

Having an inventory of basic foodstuffs and water is essential. It will keep you calm. You won’t be in desperate straits. It will give you time to carefully assess the situation and choose your best option.

Option?

Well, yes. What if the breakdown stays broken down for months? War…hyperinflation…a full collapse of the financial or political system – the crisis could take many months to run its course. In the meantime, supply and distribution systems may be severely or completely interrupted. You need a strategy.

And that’s where the family stronghold comes into play. First, you must be able to get there. When we were confronted with the Y2K crisis more than a decade ago, we lived in Paris. Maybe the French bureaucrats would be able to maintain order…and maybe they wouldn’t. We just kept our tank full of gas, just in case. It only took one tank of gas to get out to our country house. We figured we’d wait for the desperate mobs to leave the streets. Then we’d drive out of the city and make our way to the country. Once there, we had food stockpiled in the pantry and firewood ricked up to the eves in the barn. There were cattle on-the- hoof in the fields and chickens in the henhouse.

Your stronghold should be a place where you can live almost indefinitely – on local resources. It doesn’t mean you have to have everything you need on your own property. But you have what it takes to trade with your friends and neighbors to get what you need. You may have to barter for a cow…or vegetables…with the local farmers, for example. You may have to improvise with tools and machinery. You will almost certainly get your hands dirty. And you should keep on hand some small gold and silver coins. They could be useful.

Of course, your standard of living will surely go down – at least in money terms.

But some people actually yearn for simpler, more “authentic” lives. Some find genuine satisfaction in small community life, with heavy emphasis on self-sufficiency and survival skills. As for us, we’re never happier than when we’re cutting firewood or planting a garden. Keep your laptops and your hard drives. Give us a wrench and a hammer! Dining “al fresco” on “dinde aux groseilles” at a fancy restaurant is fine…but we’re just as happy eating a turkey sandwich outside in the yard.

A breakdown in complex civilization? Bring it on! Well, maybe not…

Regards,

Bill Bonner

for The Daily Reckoning Australia

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