Lets look at Japan as a key element in the global soup. Why is there a "carry trade" in the first place? The carry trade is an outcome of Japan's bubble. Their bubble was based on their gigantic trade surplus. Their giant trade surplus enabled them to lower interest rates in an effort to keep the yen from soaring. Lower rates enabled people in Japan to borrow at 0% to speculate on real estate, both in Japan and outside of Japan -- for example in Hawaii. In other words, the Japanese bubble stemmed from its trade surplus and high savings rate -- and those two elements blew their bubble. When Japanese property crashed it left the banks insolvent -- the entire lending scheme in Japan, including the collateral used by Japanese companies to back their bank loans, evaporated. Every bank was bankrupt in a mark to market environment. Japan, being Japan, did nothing to face up to this. They decided to wait it out -- and the carry trade became a way to wait it out and "fix" the problem a bit at a time. Meanwhile the Japanese government spent money at an unheard of rate -- and to no avail. To this day, Japan fears the yen -- and its eventual rise.
Now compare it to our situation -- we are nothing like Japan. Our bubble is not based on a high savings rate, a soaring currency and a huge trade surplus. Our bubble is based on easy money, no savings and a gigantic hole in our economy, and of course it is based on a dollar that is at risk of collapse.
Could we have a banking crisis? We already have one. But when the day is done, you will not see China and India back away from becoming increasingly urban consumer societies. Their aspirations do not depend on our banks. China has a soaring currency, a massive trade surplus, a sky high savings rate and a huge population migrating to the cities by the tens of millions each year. China has some of the risk factors of Japan, but with growth at white hot levels they really need to slow down. We are helping them to slow down. That is good for China. The next phase for China is to allow their population to enjoy some of the fruits of the past 30 years of extraordinary growth, and to set the stage for the next thirty years of their growth.
The global financial system has huge cracks -- there are huge issues. There will be pain. We will suffer. But growth outside the US will not halt. There is no way to put the genie back in the bottle. And in the end, in large part due to our problems, inflation will haunt us even more than in the past. That is our destiny -- and it is one of our own making. |
