Reply #15: Japan scenario is possible since the dollar is devaluing [View All]

Much like Nixon's post Vietnam war 'strategery' of letting the dollar devalue, inflation took off because the war had to be paid for; Dr K had Iran buy up surplus US war materiel to keep things crawling along for the M/I complex, while home equities soared in CA along with property taxes and the 'hidden tax' of inflation. Dr K then counsels the Shah to raise oil prices to pay for the US arms shipments. Big business hollowed out the US manufacturing industries-- and the tax code promoted this activity-- while the world was awash in Eurodollars and Petrodollars.

The value the Japanese thought they had turned out to be less than they bargained for since it was all dollar denominated. As long as oil is paid for in dollars, that get recycled into the financial system and can return to the US, there's still a chance for recovery.

However,

""In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects...

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.""

That may not last much longer.



BIS warns of Great Depression dangers from credit spree
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/25/cncredit125.xml&ref=patrick.net