The Yen Dollar Euro Salad

0:00David McWilliams: On the podcast today, it's all geopolitics, it's geo-economics, it is what is driving the Americans, who in the last couple of days have broken with all the rules and all the mutual agreements with the Europeans. Americans are selling euros to buy yen, to prop up the yen, to solve a problem that the Americans cause themselves. That's what it's all about. If you're interested in the global economy and geo-economics, this is your podcast. Talk to you in a couple of minutes. Hi, this is Paige from Giggly Squad, and today's episode is brought to you by McDonald's. Honestly, Caesar sauce and a Diet Coke at McDonald's might be the perfect girl dinner, and McCrispy strips dipped in Caesar sauce, no notes.

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1:40To understand the economy, you have to understand human nature. This podcast is powered by Acast. how you doing there it is time for the podcast i am looking down the tube here at john he is now officially still organ's answer to lance armstrong he has become he has become a cyclist yeah he has become not only the site are you slightly a mammal john or are you oh no no no but i i have different enhancements oh like lance armstrong yeah but they're different they're much more fun. So tell me you bought yourself an electric mountain bike. Yes I did and my idea was because you know I have a gammy foot and I broke the ankle and blah blah blah it hasn't healed right I'm working on so I can't go on my big hikes anymore so I decided aha I still want to be in the mountains so I went out and bought a bike and since I'm not really into cycling I decided to buy an electric one make it easier.

2:44Of course of course we're not that vintage John We're not that vintage. Electric everything, John. Electric everything. So I was bombing around on my bike up in Tree Rock last night. Gorgeous evening. Really lovely. And I was bombing down the road on the way back to the car. And I got up to it. Like I was really flying it. You know, I haven't been that fast on a bike in a long time. About 50, 55 kilometers an hour. And then I realized there's a massive turn at the end of this. and I just didn't have the manoeuvrability so I ended up in a bush but anyway, there you go Did you actually end up in a bush?

3:21I did, yeah You loon, you loon John I'm alright though, I'm alright We should walk gently Yes, wheelchair I think Preferably holding hands with an adult and away we go Well, apart from your lance arms I was just looking, you're kind of looking a bit like Sean Kelly lean Yeah, that's it. Gaunt, even dare I say, shedding the pounds, looking like a he-man. I tell you, it's a whole new world, Mr. Davis. It's a whole new world. Okay, what do you want to talk about today? Well, yes, Mike, the yen and Japan are on my mind because I've been reading a lot about this. It's all over the press and everything.

4:02So America is buying lots of yen and there's lots of intervention. Besant is jumping in there. but I don't really understand what's happening, what sparked it, why they're doing that, what are the implications of that, what are the implications for Japan in the end, what are the implications for America and the dollar, and actually what are the implications for the euro? Okay, John, big, big question.

4:29David McWilliams: Dear listener, you may well have been aware over the last couple of days of lots and lots of news about the American treasury intervening, buying Japanese yen, but uncharacteristically or unprecedentedly not using American assets to buy the yen, but using European assets. So let us explain everything. First things first is what is happening to Japan? And why is the Japanese currency, the yen, been weakening against the dollar over the last couple of years? The first thing is what we call financial repression, John. So the Japanese have, over the last 30 years, tried to keep the rates of interest in Japan very low, even going below zero for some time, but very, very low interest rates.

5:25David McWilliams: Now, why would they do that? Firstly, countries that are getting old, that get old, tend to have far more savers. It's a thing called the lifestyle hypothesis of economic spending. And the idea is that you don't have any income until you're about 18, right? So all you're spending, you're spending somebody else's money. Then from the age of 18 to around 58, 60, when you're actually earning your own money, that's the time you tend to spend a lot. And then you save when you get old, right? Because A, you're a pensioner, and B, you're actually spending your accumulated savings that you've accumulated over your lifetime of earnings, right?

6:06And you're not out in the skies as you were when you were young. Exactly. Exactly. As I was last night. That's totally different. I'll explain that to you. Off air. Off air. Not on air. This is the worst thing about doing those little bloody TikTok-y things. You can see me now. You can see the evidence, right? The bloodshot eyes. Anyway, right. Get back to it, right? So this is a big story.

6:29David McWilliams: the reason it's a very big story is because it shows America's throwing its weight around again. So you can't divorce this from Trump's foreign policy, from his trade policy, etc. So this is why people are animated by it. But the first thing first, right? So Japan is a very old country. It's the oldest country in the world in terms of the percent of its population that are now in and moving towards pensionable age. They've had very, very low falling birth rates for many, many years. The Japanese don't like immigration, in which case they haven't done what the Europeans have done and the Americans have done, which supplant their own population with foreign workers.

7:11David McWilliams: So as a consequence of that, Japan is getting old very quickly. It's also not growing because, again, old people don't spend as much as young people. So take those things together and it has very low interest rates. Now, when you have very, very low interest rates, it's very hard to attract money into your own country. Why? Because the rate of interest in your country that you offer on your bonds, let's say, is lower than elsewhere. So money will gradually leave that country. And as money leaves that country, the rate of exchange will fall. So that has been going on for the last 20 to 25 years in Japan, right?

7:52Right. So the yen has been progressively weakened. Since the bust of the Asian tigers, as it were.

7:58David McWilliams: This is a result of its massive property boom that collapsed in the early 90s. Yeah. And the fact that Japan decided to respond to that by increasing government debt dramatically. What it has done, therefore, it has low growth rates, low rates of inflation, low rates of interest, but it also has a very high level of government debt because it's borrowing to keep the show on the road. But the fascinating thing about the Japanese is their savings are so high that they can finance all their deficits themselves, right? And their savings are so high that they actually finance other people's deficits as well.

8:37David McWilliams: So I'll explain all that. So the United States has revealed its weakness by this hand that Besant played in the last few days, which was meant to reemphasize America's strength, but it actually has exposed the fragility. And this is where we will start. So the first thing is what is America's fragility, right? The United States wants to avoid anybody looking too closely at the numbers of American debt. But we'll give you them here, and I'll explain why it's all tied together. But are the numbers of American debt, are they not public knowledge? I mean, people are talking about them constantly. The Americans just don't want people looking at the entrails too much because it's actually an unpleasant picture, right?

9:27David McWilliams: So let's start, right? Debt-GDP ratio moving towards 120 % of income. So your debt, your income, about 120 % of your total income. To give you a sense of how that has changed, in the 1980s, it was about 30%. At the 2008 crash, it was 60%. So now American death to GDP is worse than it was in the 2008 crash. Not only worse, but it's twice that. So how are they financing all this, right? It is now at the highest level it's been since 1945, months after the Second World War, when you would expect a country to borrow an enormous amount simply to fight the war. Americans are fighting wars all the time, but they've never fought anything like the Second World War, and yet still their debt-to-GDP ratio now is enormous.

10:23David McWilliams: Now, there's some calculations, and it's slightly less than that. There's other calculations that's slightly more than that. But just take it as read, it's between about 110 % and 120 % of GDP. Now, why does that matter? It matters because if your debt-to-GDP ratio is above 100%, the rate of interest really matters. And if the rate of interest is higher than the rate of growth, you have what is called a debt dynamic which becomes unsustainable. Right. Just explain that a little bit. So let's say your debt to GDP ratio is 100 and your rate of interest is 5. That means every year you've got to pay 5 % to somebody else for buying your bonds, right?

11:07David McWilliams: If your growth rate is 2 % or 3%, it means that every year just to stand still, you need to continue to pay back more and more debt. Why? Because the rate of expansion of your debt is higher than the rate of expansion of your income. The rate of expansion of your income reflects your tax base. So as a consequence of that, you've got to incur even more debt to pay the existing debt. And this is why debt dynamics of over 100 % of GDP are important. That's the first thing. Second thing is the United States now, just to give you a sense, is paying interest of around a trillion dollars a year just to service its debt.

11:51David McWilliams: That's amazing, isn't it? That has increased dramatically. And again, to give you context on that, it is now paying more to pay off the interest on its debt than it is to finance the entire American military worldwide. Now, that is something... That's mind-boggling. You've got to get your head around. Especially when they're in the middle of a war as well. They're in the middle of a war. And it's basically the idea is the American debt repayments are$1 ,000 billion a year, or moving close to that. So just to get you said, a trillion is$1 ,000 billion. So that is what America is paying to its creditors.

12:34David McWilliams: Now, the question is, who are America's creditors? About half of American assets are owned abroad. And that is America's weakness, because in a bizarre way, America, despite being the world's superpower, actually depends on the kindness of strangers. And the strangers are Japanese, European, and Gulf states that have largely bought up America's debts, as well as China. but the Chinese have been playing a game with the Americans that we know the Chinese have been trying to reduce their exposure. But that doesn't mean, right? So that's the background noise. Japan owns around 1.7 trillion of American treasuries.

13:23David McWilliams: So what happened? The Japanese have had a currency that's falling against the dollar. The problem for that is that makes Japanese exports to America cheaper. As Japanese exports to America are cheaper, it means Japanese exports to America become greater for the Americans. This flies in the face of Donny J's trade policy, where he wants to slap tariffs on everybody. So the Americans, number one, want the yen to rise. Number two, traditionally the way you do this is you coordinate intervention with other central banks. Now, why is this important? It is important because it sends a signal to financial markets that the central banks are not happy with a currency weakening.

14:08David McWilliams: They want it to strengthen. Now, more than sending a signal, what this does is it puts a floor under the currency because people realize, okay, if the currency falls below a certain level, the central banks will come in and buy it and push it upwards. Now, why is that important? That's important because it takes out the speculators in the currency market. So people who would, what they call, short sell the yen, people who are betting that the yen will fall further, those people will have been burned by what the Americans did this week. Can I just say, isn't that slightly ironic, given the fact that that's where Besant made his money, shorting sterling back in the day?

14:49That's very true. Besant was, just so you know,

14:52David McWilliams: the lawyer in the George Soros team that destroyed sterling on what they call Black Wednesday in 1992. It is ironic. He is a currency trader by his own profession, which is the legal side of the currency trading. Okay, so what is going on? The Americans would normally intervene in a market. So basically, what the Japanese would say to the Americans is, look, we're not that happy with the weakness of the yen. You're not that happy with the weakness of the yen. What do we do? They coordinate. They say, okay, what we will do is we will try to increase the price of the yen to boost the yen. Right.

15:35David McWilliams: So the first thing is you've got to buy yen. Now, in order to buy yen, you have to sell something. Yeah. Normally, what you would do is the Americans would say to the Japanese, look, why don't you sell lots of your American treasuries that you own, and with the money you raise from that, you can buy your own currency, and we'll help you along the way. And we ourselves will also sell dollars in the market against yen, so we'll push the yen up. That's normally what happens, okay? This time around, they've done something odd, unprecedented, and very much against the European nations. the Americans, rather than sell their own treasuries, and rather than encourage the Japanese to sell their stash of American treasuries, they have used euros that the American treasury has in its reserve account.

16:34David McWilliams: Now, that is unprecedented because it's now apparent they didn't tell the Europeans that they were going to do that. Would they normally tell them? Yeah, completely. So there was a thing in the 1980s called the Louvre Accord, 1986, which is where you get this coordinated central bank action to try and boost the dollar or undermine the dollar, whatever it happened to be. And it's always coordinated. It's always done with the cooperation of other central banks. And that makes it more effective because in effect, what it says to speculators, look, on the other side of this trade are the people that print this currency.

17:12And you may think you're rich, but you're never as rich as the guy who can print the

17:16David McWilliams: currency, and that's the central bank. So usually that's why it's effective. Yeah. They didn't do that. The question is, why didn't they do that? And how does this all relate to America's precarious debt financing position, right? Is this another kind of America punishing Europe for whatever reason, as they have been since Trump has got into power? Well, it's very much part of the disintegration of the global rules-based order, where you have the G7, you have hotlines between all the different countries. Behind the scenes, the bureaucrats will say, okay, we're going to do this, we're going to tell you about this, we're going to inform you, la la la.

17:59David McWilliams: This is another signal. Trump doesn't care about this stuff. And Besant doesn't care about this stuff. And you know what? the Europeans, while they may be allies technically, frankly, we see them as part of the problem. Yeah. And we are going to use their currency in order to fix our problem. And our problem is the Japanese yen is too weak. Now, the question is, can central bank intervention work in the long term? And usually the answer is no. If Japan is getting old, and if Japan is saving too much, intervention won't change that long-term trend. Yeah, yeah. It seems like it's only a... It's a structural thing.

18:41Yeah, it seems like it's only a short-term thing because, you know, people are getting old and they're going to keep getting old. They're going to keep it on them, they die. Yeah. So, basically, this is a signal that Besant's Treasury doesn't give a monkey's

19:00David McWilliams: about what the Europeans think. And, of course, why is this? this is the whole thing, that the debt situation in the United States has got so chronic that the United States cannot afford for the rate of interest on its bonds to rise any further, because they're already above 5%. Right. So if it had sold its own treasuries in order to buy yen, the rate of interest on its treasuries would have risen as the price falls, and this would have had a straightaway immediate impact on long-term interests in America. And of course, long-term interest rates set the interest rate for short-term interest rates, not vice versa, as many people think.

19:47David McWilliams: And obviously, it sets the key interest rate for the American economy. So banks finance off the long-term interest rate, if that rises, the cost of finance rises, the rate of interest rates on mortgages, on house loans, on car loans, student loans, they all rise. And of course, America doesn't want that before the midterms. That's the last thing they want. So what they've done is said, okay, how can we inflate the yen without deflating our own treasury market? What we're going to do, let's use the European's currency. Right. Okay. And how did the Europeans react to this then? Now, this is very interesting.

20:29David McWilliams: So, the ECB was made aware of the US moves to sell euro to buy yen on Friday last, after the trade had been executed. The ECB president, Lagarde, and Scott Besant spoke about the intervention on Saturday, but the actual trade occurred on Thursday. So this lack of coordination highlights the really unusual nature of the joint Washington Tokyo effort to boost the yen. It's the first time in almost 30 years, right? Typically, as I said, Americans would have been expected to use the dollars in such an operation. ECB officials have viewed, and this is kind of leaking out from the ECB, the decision to use dollars in the trade as unprecedented, and it's a breach of longstanding conventions and cooperation between Western voluntary authorities, right?

21:24Right.

21:25David McWilliams: Since the Second World War, central banks, as I said, and finance ministers have always stressed this idea of mutual trust, consultation, la la la, and the Americans have just driven a coach and horses through that. One person in the ECB was quoted saying, this is, quote, very striking and sad. It is a sad day. It has never happened before, right? So these decades of close cooperation between the ECB and the Americans has just been shattered. So that's a European reaction. It's kind of like fighting talk on one hand. But what does it actually mean for the euro in the short term and the long term?

22:04The interesting thing is that although the Americans used euros, it hasn't really moved the euro exchange rate at all.

22:12David McWilliams: So I'll just give you, if this day last year, August 2025, you were going to the States on your holliers, you would have got, you were an American coming to Europe on your holliers, right? You would have had to give the Europeans 1.16 US dollars to get a euro. So if you want to get 1 ,000 euros, you'd have to give$1 ,160. Okay, yeah. Today, the exchange rate is exactly the same. It's jumped up and down. Yeah, yeah. It's 1.16 today again, right? So basically, it hasn't had much of an effect on the European currencies at all. But is that not just the first tranche of selling off the euro to buy yen?

22:59I mean, if they continue to sell off the euro, will that affect the exchange rate then?

23:05David McWilliams: It will, but now the Europeans are wise to it. So this is the whole thing, right? And so what if they're wise to it? What can they do? The Americans are not the only player in this market. Okay. So the thing is, the Europeans, John, could retaliate and might retaliate. And this is why, remember I was saying that trade wars tend to lead to currency wars, tend to lead to fractures in diplomatic relations. And again, you can have no doubt that at the senior level in the European Union and in the ECB, they are sitting around today thinking, how do we react? What will we do? Okay, I'll tell you what, Mac, let's tease this out a bit further and see what might happen after a bit of this.

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26:40So, Mac, America selling off the euro without telling us, which is unprecedented, as you're saying. But what is the upshot and what can Europe do to protect the euro, to protect the economy, and also to avoid any further escalation? Okay, so I think it's fair to say

27:02David McWilliams: that on every front, European diplomacy with respect to America has been don't poke the bear. Allow, or the other metaphor is, you know, allow the baby throw his rattle out of the pram, right? Because by provoking him, you simply incur the madness of the mind of Donald Trump and his mates. So let's not do anything. Let's hope this goes away. The question then is, can the European Union, which is after all a union of over 500 million people, so it's at least a third or a quarter bigger than the United States, can the European Union continue to be treated as a second-rate power? Or will the European Union react?

27:53David McWilliams: And then if it did react, what would be the upshot? So what could it do? The fragility of the United States, I come back to the point at the very top, is that despite being the only superpower, or the major superpower, despite being the biggest military power, it is dependent on the kindness of strangers to keep its economy going. But in effect, America's prosperity is rented. It's not earned, because they are borrowing four, five percent of GDP every single year just to stand still. Donny J's big, beautiful bill is nothing more than a effort to cut taxes for the rich today and kick the bill out into the future when Donny J will be well gone.

28:43David McWilliams: Yeah. Now, the Europeans are sitting there and have for many years accepted the truism that we need to buy US assets, simply because the long term rate of return, the risk free rate of return has been since the Second World War, the American Treasury, because nobody can contemplate the Americans defaulting. You might remember we did a piece on Alexander Hamilton. And Alexander Hamilton was the man who actually paid back all the debt of the revolution, even to the creditors who are British, simply because he said that if we default once, we will lose our credibility. And so the Americans have never defaulted on any of their assets.

29:31David McWilliams: And that has been assumed to be the case into perpetuity. But what would happen if they did? Well, now people are saying, hold on a second, if they're not prepared to raise taxes, and if they are not prepared to cut spending in the United States, well, eventually the United States will go the way of, for example, all big reserve currencies, whether it's the Spanish Real in the 1700s, the Dutch Gilder, the Florentine Florenton, or again, the most local example of that is the English pound, Sterling, which gradually but progressively became a small currency rather than a big currency. So, for example, 100 years ago, most of foreign lending around the world was done in sterling in the way it's done in dollars.

30:23So the demand for sterling was huge.

30:26David McWilliams: Today, the demand for sterling is very, very small. It's like for people going on holidays to the UK or for people buying exports from the UK, but we know that their exports aren't anything like they used to be. So could that happen to the dollar? Of course it could. And in fact, the likelihood is that's what will happen to the dollar unless they change their financial architecture to become a net creditor again as opposed to a net debtor. It's very hard to imagine America becoming a net creditor again, despite the fact that it's the leader in AI and the leader in tech, etc. Because what Trump has identified is its trade deficit is the problem.

31:06It is not producing enough manufactured stuff. But that was of their own design, though, wasn't it? Initially.

31:13David McWilliams: Of course, they're on. Well, I mean, this is part of the blowback from the 1980s Reaganite idea that it doesn't really matter. You can produce stuff abroad. Don't worry, we can produce the car industry. You can send that to Mexico. We can buy, you know. So that was the sort of neoliberal mantra was, these things don't matter. MAGA's mantra is, these things do matter. And actually, many people, once you strip away a lot of the rhetoric, can understand the logical position of the Americans. It matters for a country that it produces stuff. It absolutely matters, right? But the financial implication of not making things is you buy stuff that's made elsewhere.

31:55David McWilliams: Now, in order to do that, if your income is falling, you have to borrow. Now, what the Americans are doing is they are borrowing from foreigners to buy stuff the foreigners make in the first place. That is unsustainable in any worldview. What could the Europeans do? If, for example, you had a Le Pen government or an alternative for Deutschland government, people who are not as committed to the Western alliance, people who said, you know what, we've got to stand up for ourselves, look what they're doing in Ukraine, look what they're doing in Israel, look what they're doing, you know, all these places, right?

32:32David McWilliams: it is much more likely that those types of government would actually do the following, which is they would react to the Americans using euros, i.e. selling euros. They would react by buying euros. And what would they have to sell to buy those euros? They'd have to sell their holdings of American assets. And this would drive up the rate of interest in America, precipitate a financial crisis in the United States, but in so doing, teach the Americans a lesson. Right. Now, who is prepared to do that? That's my point. At the moment, the Europeans think, look, the last thing we need is a global financial crisis.

33:15David McWilliams: We're not ready for it. Our own economy is weak anyway. Our people are happy. Nobody's ready for it, though. There's one crowd who would be ready, which is our friend the Chinese. Right. Okay. Now, the question is, would China begin the process of disrupting the international financial system in order to show the world that it can insulate itself? Question is probably not. Why? Because the Chinese are absolutely dependent on international trade because they are exporting so much. So they are happy. They don't want to upset the apple cart. Right. The Europeans don't have the balls or the inclination to do it.

33:58David McWilliams: The Japanese, as we know, are now a power, still a power block, but they are a wilting power. And there's nobody else in the game. So for the moment, the Americans can probably still get away with behaving badly. And what about the long term then? Long term, history tells us that countries do do stupid things. So, for example, we talked about the 1873 crisis last week and the week before. What really precipitated that and prolonged that was everybody buying gold, which pushed up the price of gold, which pushed up exchange rates, which contracted the money supply. countries have done stupid things in the past that are not legitimate in global economic terms simply because they want to pander to a domestic audience, which is standing up to the Americans.

34:58David McWilliams: Now, interestingly, we know one thing about Donald Trump is he is more unpopular outside of America than in America. We also know one thing that even incipient right-wing or populist movements in Europe are loathe to identify with Trump because they know that Trump is an electoral disaster. So you could see a strategist in Germany or a strategist in France thinking it could be quite good for us to precipitate a mini crisis with the Americans by showing that the Europeans have them by the balls, by virtue of the fact that we own so much of their debt. And that, I think, is the world we're moving into.

35:41David McWilliams: Because once you break these international rules-based order, once you tear up the idea of coordination, once you say to your allies in Europe, you know what, we don't care about you. You're on your own and frankly, you're annoying, right? And we don't like your liberalism and all that stuff we've talked about. Yeah, yeah, yeah. Then at some stage, America that actually needs protection of the global rules-based order, which pretends it doesn't, may well come up against the European leader or a set of leaders that are prepared to actually poke the bear, to actually say, you know what? Yeah. We're going to react.

36:25David McWilliams: And if that were to happen, we are in an absolutely new world. But I'll just leave it, John, the logical conclusion of everything that has happened over the last two years, the terrorists, the trade war, the insults, all that sort of, and then this weekend's deploying using euros solved their problem without telling the Europeans that they're doing it. All that points to gradual chipping away of the rules-based order. And every action, John, at some stage, prompts a reaction. Yeah. And if there were nationalist governments in Europe that knew that they could actually have an electoral advantage by punching the Yanks in the nose, well, then they might do it.

37:15David McWilliams: And in that case, a country like Ireland that has been straddling Europe and America so dexterously saying we're going to have one foot here and the other foot in America and one foot in Europe, then we might have to make a choice which side are we on. and that's something that small countries never want to do. Well, Europe needs to, in the words of Jinx Lennon, grow a pair of balls. One of the finest troubadours ever to come out of Dundalk. So we leave it there and we'll talk to you next day.

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