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Pastimes : Ask Mohan about the Market
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To: studdog who wrote (8550)11/19/1997 10:53:00 AM
From: Tommaso  Read Replies (4) of 18056
 
I guess the reason people worry is that the Japanese do hold $800 billion in U.S. bonds. It is hard to see how they could work off an large part of these without forcing up U.S. interest rates, since this is a large fraction of total outstanding U.S. debt. The U.S. Federal reserve could monetize some of these (i.e. take the bonds and create bank account deposits in place of them). If international payments continue to be largely settled in dollars, these newly created dollars could be used to pay off debts of Japan's institutions.

At this point I have a very hard time keeping all this and its ramifications in mind.

If the Fed allowed such sales to force up U.S. interest rates, the "flight to quality" might become a complete route, collapsing the stock market.

That might be what happens. The 30-year treasury is already very appealing to many people at close to 6% return. Think what it would be if it offered 7 or 8%, especially if confidence in the stock market evaporated.

My own concern in this is that my wife's IRA account is about half in long-term treasury strips, which have been excellent lately. I would hate for her to lose those profits. But I can't predict what the Japanese will do. I think they should simply inflate, creating fiat deposits in yen. But maybe that's against their honor.
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