Council of Canadians

[Rakesh Bhandari]

What about Japan's cranky scheme, well laid out by George Melloan of the
WSJ, where the govt buys stock from banks only if they turn around and buys
bonds to finance fiscal expansion.  Since the banks pay less in dividends
to the govt than they receive from the bond investment, they profit while
recapitalizing their banks because as zero risk assets the bonds don't
count against the capital base.

However,  if the credit rating of the government plunges and interest rates
have to be raised to fund further debt financed fiscal expansion, the banks
will be sitting on top of less valuable bonds, along with all those non
performing assets. There may still may be a desperate need to recapitalize
Japanese banks in the future, and this will trigger off the sale of US T
bills and other instruments. The US ability to serve as countercyclical
source of demand will be threatend, but there won't be a resort to deficit
financing after the 1990s experience which seems to show (at least to Brad
deLong) that investment and growth are best generated by fiscal
conservatism. The 90s have sure reinvigorated the Treasury View.

All odds are still on for a global depression, triggered by Japanese
banking crisis or US destruction of international money or shortage of
exploitable labor as expansion into China fails. Or something. All these
problems are recognized by the authors of Dow 36,000/40,000/100,000. It
really does not depend on what a ultra leftist wants.

Yours, Rakesh