Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest
Paul L. Kasriel
The line in the sand is drawn..
How do you answer the probability of this outcome? Are home prices falling? Are home prices peaking or rolling over around the world? Is the recession spreading? Are the banks tightening lending standards? Are foreclosures increasing? Does the commodities blow off help consumers? Are long term indicators pointing up or down?
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