Thus they have been forced into selling the fruits of their toil cheaply for US Dollars and have returned their surplus in part to the US in an effort to shield their remaining wealth from suspect local currencies and impaired financial intermediaries and also to service their onerous, sometimes crushing, foreign debts. In consequence, a side effect of the Western Credit Bubble has been the transformation of a vast swathe of the world's populace to the status of indentured labourers. The trouble with Bubbles is that they gradually require ever greater amounts of credit to fuel them. Thirdly, asset prices are no longer rising and thus cannot be so easily monetized, so increasing recourse must be had to the traditional banking system and its capstone, the Fed. Fourthly, there are greater levels of debt outstanding to be rolled over and larger amounts of interest to be compounded.
Debt begins to beget debt.
As credit quality now deteriorates and defaults rise, solvent enterprises face higher credit spreads and bank balance sheets, too, become degraded, especially after a long period of competition for assets has led to high levels of loans in comparison to deposits, and a reliance on wholesale sources of funding, so impairing liquidity ratios. Even more conservative banks may now suffer as the increasing expectation of a downturn and of successive cuts in the Federal funds rate results in a lowering of the yield of longer-term riskless assets and even the appearance of an inverted yield curve for these securities. The standard practice of lending long and borrowing short now becomes a drain not a boost. Once the financial system begins to totter, the central bank focuses intently, even exclusively, on its prime directive - the preservation of its cartel. If asset prices look like spiralling downward in the bust even more rapidly than they once catalysed each others' rise in the boom, action is never very far away.