As always, your analysis is lucid, careful and grounded.
>So, in order to fortify their balance sheets, Japanese banks may indeed
>have to withdraw some of the very large amounts of capital that they have
>invested in the US since the early 80's. This in turn would increase the
>US balance of payments deficit and put additional pressure on the dollar
>(in addition to the pressure of an increasing current account deficit).
>There will be less of a capital account surplus to offset the current
>account deficit, and hence the dollar will be more likely to fall.
Yet at the same time, the US possesses non economic power to prevent such a
divestiture. The US can force Japan to hold on to (or continue to buy) US
securities as defacto payment for the provision of regional security, a
quid pro quo for continued access to the US market, and as insurance of US
cooperation in future bailout efforts (to say nothing of the need for
dollars for international transactions, including purchase of oil and other
commodities priced in greenbacks). The non economic cards all seem to be in
US hands. In some ways, the US current account deficit strikes me as index
of US imperial power (how do US imperialism and power politics generally
fit into your analysis?) This is one reason I am skeptical of a world wide
flight from the dollar based on a loss of confidence in the US economy.
It's true that Summers may allow the dollar to fall a bit as a way of
aiding US exporters while spreading the bubble around a bit to Japan. But I
really doubt that the Japanese banks have the power to divest from US
assets in a massive way that runs deeply counter to US interests, unless of
course Japan is forced to do so due to a collapse in its banking system.
By the way, there remains another plausible scenario for a worldwide
financial crisis coming from massive defaults from commodity exporters due
to catastrophic falls in the terms of trade.
>I would be very interested in any sources that you could give me on the
>likelihood of the withdrawl of Japanese capital.
I got the idea from Susan Strange's thoughtful *mad money* from the
University of Michigan Press, 1998. And my reading of the WSJ and NYT
seemed to confirm the non neglible possibility of such an event.
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