Earthquake/tsunami that devastated Japan will add to dollar woes

The cost rebuilding the areas of Japan that were devastated from the one-two punch of the earthquake and  the tsunami will be enormous.

Fortunately, the Japanese are among the world’s biggest savers,  which means that  they have the funds to spend and will not have to solicit donations as did New Zealand after the 6.3 quake that nearly destroyed the country’s second largest city, Christchurch, on February 22.  Unfortunately for the dollar, though, much of the Japanese savings are in dollars, including the Bank of Japan’s treasury debt holdings of nearly $900 billion.

The Japanese will have to sell some of their treasury holdings for funds to rebuild.  How much of their holdings they will have to sell cannot even be guessed at, but it will be huge because the cost of rebuilding will be huge.  At least one nuclear power plant was lost, never to generate electricity again.

Because the Fed presently is buying between 65% and 75% of all new the Treasury debt and because Japan will not—at least not for a long time—be a buyer of treasury debt, the Fed will be the primary buyer as the Japanese liquidate.

While the Fed has announced that QE2 will end June 30, the Fed will have to step up and buy as the Japanese sell.  I don’t know if there will be another official QE, but the Fed will continue expanding its balance sheet as the Japanese sell, guaranteeing more monetary inflation that ultimately will result in massive price inflation.

Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, Inc. and a frequent guest on KingWorldNews.com, says, “QE has now become a permanent part of the financial landscape of the United States.”  The coming liquidation of Japanese treasury holdings will guarantee that Richards is right.

Thursday saw sharp declines in gold and silver.  Friday morning they sold off more, but as word spread that the earthquake and the tsunami had devastated parts of Japan, the metals rallied with gold ending the day up $8.80 from Thursday’s close and silver up $.86.  This week we will learn of the metals’ selloff is over or if they will march still higher in this move.