Interesting podcast by Alex Cristofaro and Alexander Mercouris.
Takeaways:
Japan has a huge budget deficit, the only thing that has kept Japan afloat is their positive current account surplus due to all their exports. But that surplus is declining due to increased outgoing expenditures for oil That is causing the current weakness in the Yen. The weaker the Yen becomes, the more it costs Japan to buy more oil - creating a self reinforcing feedback loop. So Japan has to protect the Yen. Japan was going to start dumping a lot of their treasuries in order to get money to support the Yen. Bessant has told Trump that the Yen is falling due to the increased oil prices and that the US has to step in. If the US didn’t and Japan dumps treasuries, then the market for treasuries will weaken and the US will have to increase treasury interest rates in order to attract buyers. Of course, increasing rates is not possible due to the size of the current interest payments. An increase in interest payments would accelerate the coming crisis in the American financial system.
Mercouris says that means two things.
One, the US is now buying the Yen - not with dollars but with Euros they have on hand - in order to strengthen the Yen.
Two, the US has to make peace with Iran as the whole crisis is starting to spin out of control. The US will apparently agree to allow Iran to control the Strait of Hormuz (and charge a toll) in order to restore oil supply.
My own take:
We’re screwed. The dynamics playing out simply underline the inherent weaknesses in the world financial system. Supporting the Yen is a short term fix - it doesn’t solve any of the systemic problems. Japan’s debt, the American budget deficit, increasing resource/materials costs are all problems which are not going away.
Iran has the United States by the balls. They can demand anything at this point. But any settlement should be front loaded, that is, promises to release frozen Iranian assets in the future won’t fly for obvious reasons - it will never happen. Instead Iran should demand front loading, the total immediate release of those assets as a precondition to opening the strait. Ditto with Israeli withdrawal from Lebanon and Gaza.