Rubinesque market
By April 1995, the US dollar had plunged to a record low of 79 yen to the dollar. The yen had risen by over 60 per cent against the dollar compared to its level at the start of 1991, and by 30 per cent compared to its level at the start of 1994. But the increase in the yen’s value was playing havoc with the export-dependent Japanese economy. With the yen at these levels, Japanese exporters could not even cover their variable costs, let alone return a profit on sales in international markets. The Clinton administration, despite the fact that it had pursued an extremely aggressive policy towards Japan, could not ignore the impact of the rising yen-falling dollar. For the US, the danger was that if the continued fall in the dollar set off a financial crisis in Japan, Japanese funds could rapidly be withdrawn from US financial markets, setting off a rise in interest rates and plunging the US economy into recession. This was at the very moment it had just recovered from the recession of 1990-91 and several years of very low growth.
In April 1995, an agreement was made to drive down the value of the yen and push up the value of the dollar—a kind of reverse Plaza. But this agreement, which averted an immediate dollar-yen financial crisis, was to have longer-term consequences. The dollar’s rise was to set in motion a US financial bubble, which continued until April 2000. The increase in the value of the dollar and of US assets resulted in a flow of liquidity into the US from the rest of the world. In 1995 the rest of the world bought US government securities worth $197.2 billion. This was two and a half times the average for the previous four years. In 1996 purchases of $312 billion were made, and in 1997, $189.6 billion. Altogether, a total of more than half a trillion dollars worth in just three years!
There was an immediate impact on the stock market. The S&P 500 index, which had increased by just 2 per cent in 1994, rose by 17.6 per cent in 1995 and a further 23 per cent in 1996. In December of that year, Greenspan made his warning of “irrational exuberance.” In 1997, the S&P index rose by a further 30 per cent.
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