"What happens when the most powerful nation in the world, with a reserve currency everyone trusts and holds, decides to push a big credit expansion — again, at the instigation of our financial sector? The creditworthy borrowers this time are not in the United States — they are in Asia, Latin America, and even Africa. They have little debt and great prospects; for a mere 1% per year they can borrow American dollars, spend the funds at home, and turn paper money into real assets."
Such arbitrage carries echoes of the yen "carry trade" of the nineties, when Japan was facing much the similar economic conditions and were following similar expansionary policies. It kept the yen weak, thereby boosted exports, increased trade surplus and reserves accumulation. Now Johnson and Boone feel the same about American carry trade - "it weakens the dollar, lifts the economy out of recession through exports, and creates inflation that reduces the real value of our debts". Borrowers in dollar would stand to benefit in two ways - low interest rates and weakening dollar.
While it is true that the recent crisis has seriously dented the credibility of dollar as the global reserve currency of choice and set the stage for its weakening in the years ahead, I am not sure whether the parallels with Japan can be extended much. For one, unlike the nineties, we now have a global demand slump, which means that exporting the way out of recession may not be possible. Second, the global slowdown has left the world awash with savings and limited investments opportunities, and thereby much reduced demand for capital. Third, chastened by the fresh memory of the bitter experiences from the sub-prime bubble and the regulatory restrictions that are likely to be in place, American banks may not be so forthcoming with commercial loans (as Japanese banks were in the nineties) required to sustain such currency trade. Finally, the ballooning US deficit and hardening bond yields means that the spectre of inflation and higher interest rates loom large, at least in the medium term. This would in turn make dollar borrowing unattractive.