Carry Trade Predicted for the U.S.

In The Bubble Next Time, Peter Boone & Simon Johnson, mention something as a major threat to the United States, all too familiar to Japan in their lost decade, known as the Carry Trade:

The next global bubble is already under way. What happens when the most powerful nation in the world, with a reserve currency everyone trusts and holds, decides to push a big credit expansion — again, at the instigation of our financial sector? The creditworthy borrowers this time are not in the United States — they are in Asia, Latin America, and even Africa. They have little debt and great prospects; for a mere 1 percent per year they can borrow American dollars, spend the funds at home, and turn paper money into real assets. Every great bubble begins with a truly convincing shift in fundamentals.

In the 1990s this was called the “carry trade.” You borrowed from the Japanese at 1 percent and bought anything outside Japan that yielded a bit more (including United States subprime mortgages). The coming American carry trade is the same thing: it weakens the dollar, lifts the economy out of recession through exports, and creates inflation that reduces the real value of our debts. This can last quite a while — both the Treasury and the Fed are sure that early attempts to tighten policy prevented serious recoveries in Japan in the mid-1990s and in the United States toward the end of the 1930s.

We will finally stop the term emerging markets and call all of these nations The New Rich.

Usually when we talk about wealth redistribution we mean from poor to rich (as implemented in the United States), but it seems now the term should be redefined as from our nation to theirs.

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