To: Jacob Snyder who wrote (26411 ) 9/20/1999 5:55:00 PM From: pater tenebrarum Read Replies (2) | Respond to
Jacob, i agree that the U.S. economy is better poised to survive a deflationary episode than the Japanese economy was. however, the BoJ's response to the early '90's crash in financial assets and real estate was swift as well. interest rates ultimately went to zero, and even the monetization avenue was tried for a while, as evidenced by last year's weakness in the Yen. the problem is one of solvency, not liquidity. there has been more than enough liquidity provided by the BoJ over the past decade, but the borrowers of the boom years simply went bust, and took the lenders down with them. how do you counter a solvency crisis? it's simple, and very painful: you write off the debts. this seems to have been regarded is not politically feasible by the Japanese government, but ultimately this is what's going to happen. could the U.S. experience a solvency crisis? hard to tell...since the U.S. economy is the world's largest and one of the most open, i believe it rather unlikely, but it is certainly not impossible. between '96 and year-to-date, corporate debt has grown from approx. 160bn to approx. 370bn dollars. much of this debt has been used to finance stock buy-backs and conceivably a bear market in stocks (i know, outlawed -g-) could make lenders very reluctant to continue to finance what would then look like a foolish appropriation of capital.
