Comment 47: Time to dial 911 to Japanese Government again to save the global financial system
The US trade deficit has stagnated, the housing market is in trouble, the growth rate of consumer spending is slowing, and so on and so on. Those are the usual signs of an economic slowdown and a gradual slide into a recession. However, there is something very troubling in the air this time. All the extremely over leveraged entities, from mortgage lenders, real estate speculators, hedge funds, private equity firms to financial institutes, that is, almost everyone playing in the financial and derivative markets is at the risk of a wholesale collapse. The panic is spreading to every corner of markets. The liquidity injected by central banks around the globe, including FED, is not working, since right minded market participants will not lend money to anyone that has some chance to be in trouble and the liquidity provided by central banks is simply parked in the ultra safe sectors like short-term treasury bills, causing the yields of short-term treasury bills to plummet. The sharply lower yields of treasury bills are now inducing the unwinding of yen carry trades, sending US dollar sharply lower against Japanese yen. As discussed in Comment 46, the collapse of the dollar will bring down the gigantic derivative house of cards, carrying with it the global financial system and the global economy. The plunge of US dollar must be stopped at any cost, and lower interest rates in US will only pour oil on the fire. The only one can save the day is Japanese Government by buying an enormous amount of dollars, probably near 1 trillion dollars this time, to prevent the outright collapse of the dollar.
The last time that Japanese Government played a thankless pivotal role was during the reckless 1% interest rate adventure of FED in 2003. Japanese Government bought 400 plus billion dollars to prevent the wholesale collapse of the dollar. Of course, that 400 plus billion dollars become the seed money to inflate the mortgage and the debt bubble further that is now deflating painfully. Another such dollar buying spree of Japanese Government will have an even worse long term effect than the one in 2003, but to save the life of a patient is apparently more urgent than the consideration of the long term effect of the treatment. Just as has been pointed out in Comment 28, everyone is already deeply trapped in the web weaved by the irresponsible and ill-thought-of globalization process with no exit in sight.