One of the many fascinating aspects of the recent crisis of credit is discovering that many people predicted something like this would happen as far back as 2002, like the hilarious stockbroker/blogger Daniel Davies does here. Since reading his analysis of the post dot-com boom I have been on the look out for similar predictions of the next big bubble. And here we have one from Peter Boone and Simon Johnson at the New York Times:
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.
It will be interesting to see whether this latest scheme works superbly forever or results in a collassal failure some years down the line. But if and when it does fail and results in another recession it will kind of suck.
Are recessions a normal and inevitable part of capitalism and free markets as they currently exist, and if so, is there something that can be done to improve the situation?