We are living in perilous financial and economic time. Very few Americans are even paying attention. All it takes to re-start an economy is to hand out cheap money…right?

As you likely know, my major theme for 2008 is bailouts . So far, so bad. I think the boys at the non-Federal non-Reserve have been hitting the peyote. Everything can be patched up by simply issuing more tonnages of green paper. Especially if you claim a bit of blue blood.

It wasn’t too long ago that Japan’s bubble burst from their 1980’s excesses. Remember when fear was rampant that the rich Japanese were going to buy up the world? Remember when their real estate was chokingly overpriced?

Quite predictably, the Bank of Japan responded to the bust by lowering interest rates in the early 1990’s. As you can see in the following chart they even held them at 0% throughout much of this decade.

Deflation tends to scare the fully loaded crap out of central planners. Even negative interest rates are possible. The motto is “please borrow and spend!” Otherwise, the whole system gets flushed.

This didn’t sit too well with traditional Japanese. They are thrifty savers. They tend to function just fine without Suburbans, spa treatments and vacation homes. You can make cheap or free money available but someone has to accept the loan. The Japanese didn’t take the bait.

A two-decade long deflation was the result. The Bank of Japan was completely impotent in their attempts to re-inflate and get the Japanese economy back on track.

Now it’s the US’s turn to stave off deflation. Sequential bubbles of tech stocks and real estate have seriously damaged the economy. By the way, the Fed caused these bubbles in the first place. They are now attempting to create a new credit expansion. They are a one trick pony. There is no Paul Volker and no dollar rescuing rate increases in sight.

US interest rates are now trending towards zippo. Is a 0% Fed Funds rate in the cards? I wouldn’t rule it out. Speculators are frothing at the mouth in anticipation of free funding.

Low interest rates are not what wring out excesses. Low interest rates are designed to keep the NY financial orgy going. Party on, Garth!

They still haven’t worked in the Japanese culture. Japan has yet to recover in a significant way. Will Americans take the low interest rate bait?

“Oh, hell yes, Baby, bring em on! You talkin’ free money? That’s a good thang, no?”

The US culture is saturated with the motive of instant gratification. Don’t expect many to turn up their noses at the Fed’s desperate offers. We will borrow and we will spend. There will be no lost decades around here.

In fact, I predict that a major trend will take place in the US real estate market in the coming decades. The reverse mortgage phenomenon will become a craze. My fellow Boomers will try to time their last breaths with their last home dividends. Is Doc Kervorkian still in business?

Invest Resourcefully,

Rusty

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