Some deep thoughts here from David P. Goldman of Asia Times, riffing on the fact that banks and hedge funds around the world are using cheap money to fund the US deficit. Here’s what that means:
In effect the world has turned into the Japan of the 1990s, when the central bank pumped out liquidity at 0% which the banks reinvested in government securities at 50 to 100 bps. There is no reason that this sort of thing cannot go on for quite a while. Japan’s been doing it for almost 20 years. And for 20 years the sure-thing trade has been to short Japanese government debt, and for 20 years that trade has gone wrong. Of course, this sort of arrangement ensures that the zombie financial system eats the rest of the economy, so that the Wall Street zombies turn Main Street into zombies.
If anyone tightens–Paraguay, the Central African Republic, the Seychelle Islands–the word “tighten” will reverberate around the financial markets like the voice of doom. But don’t expect any of the major central banks to tighten any time in the foreseeable future. That really would have apocalyptic consequences.