> Here's a scenario: the Bank of Japan's 0% interest policy finally succeeds
> in reflating Japan, the economy takes off, and Japanese capital returns
> home. Then the European central bank finally gives in, lowers rates, and
> European capital returns home. Suddenly, the U.S. has to confront the fact
> that it's living $400 billion beyond its annual means; the U.S. becomes
> Japan in 1989 and enters a decade of stagnation and international
> humiliation.
OK, from the Panglossian corner: if East Asia and the EU do decide to throw some money around, all that easy money will effectively refinance that US debt. Also, those foreign investments are still geared towards long-term things like factories, FDI and T-bills, not the short-term speculative flows which trashed Southeast Asian. The flood of overseas capital might slow, but probably won't stop anytime soon. This would tend to dampen or put a floor under the recession we're due to enter in the near future; while the short-term results might be nasty, i.e. bankruptcies would go through the roof and lots of consumer debt would be liquidated, hitting US credit card firms the hardest, the Fed would bail the system out as need be and prevent things from getting too messy. The result would be a bear market in US stocks (though an unprecedented boom in Euro and East Asian ones) amidst generalized prosperity, as the world economy gears up for another long boom, and a massive surge of union drives and Left party-building, as rising wages fuel rising political expectations.
I've already hedged my bets in euros, so 'nuff said.
-- Dennis