Support grows in Mexico and Canada to dollarize their economies. Promoters of dollarization have argued that the United States is their biggest market and accepting the dollar would eliminate uncertainties about currency movements. Opponents reply that they lose what is left of national control over their economies and that monetary policy will be run for the benefit of the United States. This could lead to some major political conflict in both nations. China and other emerging markets in Asia dependent upon exports to the United States for hard currency also find their trade balances deteriorating.
Japan reacts by trying to keep the yen low against the dollar in order to regain falling exports.
Efforts to reorganize the Japanese banking system stall, because slower growth makes it harder to absorb the short term unemployment that will accompany such reorganization. But lower growth and higher interest rates demanded by International Monetary Fund and U.S. Treasury advisors are counterproductive, and generally undercut investor confidence all around the world. Central banks finally move to lower interest rates, but it is too late. The absence of a new source of demand and investor confidence to offset the drop in the dollar and shrinking American the growth throws world into general depression. On the euro side, the European Central Bank learns the lesson of the U.S. recovery and lowers interest rates to the point where growth accelerates.