In 1989, when I was living in Milan, Italy, I had the opportunity to learn a very big lesson about macroeconomics. It came about because of the systemic collapse of the Japanese economy, which, at that time, had the top 10 banks in the world.
Japan didn't just have the banks; it had an economy which was the envy of the world. Articles had begun to appear in magazines such as Newsweek and Business Week about how journalists wanted to relocate from Washington DC or New York to Tokyo because that's where the action was.
I was going through the process of registering for my job as an ESL teacher, and I had purchased a copy of the International Herald Tribune. It had an article about those banks. They were all Japanese; it was emblematic of the whole transformation of Japan from a country which had lost to the US in World War II to a country which now had an economy in many ways superior to the US and led it in socio-cultural parameters as well.
There is an awful lot of anti-Americanism throughout Europe, and, though I'm broad-minded and can understand a lot of it, there are those who simply wish to strike back at Americans to enjoy a moment of fleeting superiority. There was such a person working in the Milan employment bureau, and he had to go out of his way to notice the article tucked under my arm, and then make a comment about how the top banks were now Japanese - and not American. Of course, it irritated me, but, other than that, I gave it little regard.
The thing that really struck me, though, happened within a year; the Japanese economy imploded. Not only did the Japanese no longer have any of the top ten banks, four of those banks that had failed.
Because so many of my students in ESL were businessmen, and because of my own decades long interest in economics, self-taught, I read whatever I could about the Japanese crash and got to consult with Italian bankers on the whole thing.
Finally, all of it got condensed down to a couple of articles in Business Week that summarized the relevant information and explained what had happened. It was not that complicated to understand the reasons of just how the economic and financial structures had failed.
The real problem, the one I had trouble understanding, was how the Japanese and international financial community had failed to interpret the immediate and relevant economic data correctly.
In other words, there was no great secret or backdoor manipulation that was responsible for creating the crash. There was no really new or particularly novel aspect to the situation. What had created the crash was the failure to interpret their world, a moral and existential blindness, that was fueled by greed and over-optimism.
Essentially, Japan had huge trade surpluses. The trade surpluses with United States were the result of a certain degree of currency manipulation designed to keep Japanese companies in a position to compete with American companies. The surpluses were also the result of internal barriers in Japan which added to the cost of American goods due to the internal inefficiency of their distribution system, which insured even higher prices. Even Japanese goods distributed in Japan cost more than the same product in Los Angeles, which was why Japanese businessmen bought themselves Toshiba computers while they were there.
Japan "sterilized" its US dollars by printing up corresponding sums of Japanese Yen, which were then deposited in the bank, keeping the exchange rate essentially the same. This mountain of Yen had to find its way into the Japanese economy and ended up creating bubbles in the stock and real estate markets. When you combine this with a couple of bad moves by Japanese companies, their economy went into a deep recession. Nissan, one of the most successful automobile companies in the world bet wrong and ended up being owned by the French.
Nissan invested heavily, bent on continuing to improve its robotic assembly line, but the major investment did not provide the return anticipated. The drop in cost of production didn't provide the ROI as the drop in cost didn't result in a significant slice of the US auto market going their way. Renault, a French automobile company, ended up owning Nissan, a tremendous reversal of fortune, emblematic of the whole fall of Japan's econ juggernaut.
The stock market, the real estate market, and Nissan failed within months of each other. Oh! The Japanese mafia, known as Yakusa, was involved as well, making it just that much harder to call in loans...
Four of those great Japanese banks died, while the others lost their status, and the Japanese economy and still hasn't grown in more than 25 years.
So what's the lesson here?
The lesson here is that the financial press and the business community and the government agencies in charge of banking and other aspects of our economy are not capable of seeing past their own prejudices, the narrowness of their own perspective, to get at the truth when the truth is uncomfortable and goes against the grain of what might be deemed the conventional wisdom of the stock market and international banking system.
We saw this again in 2007 when Wall Street collapsed and major banks died, such as Lehman Brothers, and we went back to the same processes that got us there in the first place.
Now what does this have to do with China? Answer: everything...
