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To: DavesM who wrote (22783)	6/18/1998 1:10:00 PM
From: Paul Fiondella	Respond to of 42771

(OFF TOPIC) Asian Crisis --- Another Look First the movement of Japanese capital abroad. It is a fact that they hold 100's of billions of dollars worth of US Treasuries. They being the Japanese financial institutions. Individual Japanese are only just now able legally to invest abroad as a result of Big Bang reforms. However these investments are likely to go through Japanese institutions. This capital outflow registers as the equivalent of a credit --- a guaranteed loan to the US Treasury that can be turned to cash whenever one needs the cash without fear of repayment. Its therefore very liquid. The typical Japanese saver puts his/her money into a trusted institution. That trusted institution is either constrained like the Postal System or unconstrained like Bank of Toyko-Mitsubishi and may invest abroad. If that institution speculates abroad and makes bad loans then how does it get the cash to pay the depositor when that depositor loses his/her job in a recession and needs the money or loses confidence in the solvency of the bank? It liquidates its Treasury holdings to get cash. It transfers the run on the bank to a run on the US Treasury. There are various assessments of the impact of this. As to debt levels in relation to GDP, you have Europe and Japan reversed. Europeans have much higher debt levels in relation to GDP. But you have to distinguish between external and internal debt and government vs private debt. In Japan's case the government is a creditor. In the US case the governemnt is a debtor. So the key to everything here is "the run on the bank". There have been several interventions already in Japan to provide troubled banks with liquidity. Even the Bank of Toykyo-Mitsubishi ( an enormous bank) got some of the money. The social responsibility demanded of these banks was to make loans and relieve the credit crunch---as you can imagine banks aren't looking for new borrowers!!! Now let's take another fact: Most banks would be insolvent if their holdings of real estate and stock were valued at market prices. Remember the effort to hold up the value of the YEN and the Nikkei until the close of the fiscal year. IT was done to keep asset levels of banks on paper at the 8% international capital lending requirement. So what would cause a run on the banks? Well if the Resolution Trust type of solution is pursued in Japan, some banks will have to revalue their real estate at market rather than purchase prices and will have to sell those assets at current market value. This will reduce their capital base and put them out of business. Would you like your savings to be in that S&L? That is why the corrupt Ministry of Finance in the corrupt Japanese political system is having a problem. They need real reform not crony reform. Someone has to pick the bad banks to close. They would much rather look for a way to recapitalize the banks without having to expose the depths of the problems. I resume they will pursue some kind of voluntary Resolution Trust. In other words reform will be difficult. As the recession deepens, if Hashimoto is wrong about his pump priming, then they are in even greater trouble. This should give you some idea of why the Asia crisis isn't going away and how capital flows worry the US Treasury. We are the world's largest debtor nation by far. So many countries hold dollars that any setback in our economy can cause incredible capital flows that would weaken our currency. It happened in 1987 and it could happen again. The dollar by capital flow measures is overvalued vs the Yen today.