jg, here’s a quote from The Dollar Crisis, which explains that all the money created by the FCBs entered the US as high powered money into our banking system, multiplying many times over, and creating the .com and housing bubbles.
“…regardless of what type of asset was initially purchased with these funds [inflows into the US], eventually, most of that capital worked its way into American banks. For example, if the capital inflows were used to buy government bonds, the government spent the proceeds on goods and services, and the providers of those services deposited the payments they received from the government into their bank accounts. The same is true regardless of whether the funds coming into the country were used to buy corporate bonds, stocks, or any other kind of asset. Unless the money was hidden under a mattress or destroyed, most of it would have entered the banking system as deposts; and deposits make up most of the money supply.
….When funds from abroad enter a banking system as deposts, they are not re-lent only once. The original amount that is lent will be redeposited and then re-lent and redeposited numerous times. …Therefore, the $3 tril in capital inflows after 1983 did much more than finance an additional $3 tril worth of debt. Those inflows were deposited, lent out, redeposited, and re-lent mulitple times. In that way, they caused the U.s. money supply to expand, fueling the bubble economy that emerged in the the U.S in the 2nd half of the 1990s’.”
That money created the Nasdaq bubble, too. What happened is that the gov’t ran a surplus, so the FCBs couldn’t buy enough Treasuries with their dollars, and had to buy other assets instead. In hindsight, we would not have had the .com or housing bubbles if the government would have continued running a deficit and issuing sufficient Treasuries to absorb all those dollars. Another solution would be to stop printing so goddamn much money!
Duncan continues, “The investments in corporate bonds facilitated the misallocation of capital that is now laying low the dot.coms and the telecommunication companies, among others. And the investments in agency debt have helped fuel the boom in U.S. property prices, that has allowed the U.S. consumer to extract additional equity through refinancing his home in order to keep spending more than he earns”.
French economist Jacques Rueff explained our dollar recycling program back in 1961, before it even existed, as he saw what would happen once we went off the gold standard:
” The functioning of the international monetary system was thus reduced to a childish game in which, after each round, the winners return their marbles to the losers”. – Rueff
In other words, the producer countries of Asia sell us their stuff, and then return to us the money we pay them. It’s a ridiculous sytem!
