By Madis Senner, CPA

Executive Summary:

We are in the midst of the Japanese paradigm. A comparison of our current polices, the financial markets as well as our mindset show striking parallels with the script written by Japan in the 1980’s:

  1. Both bubbles began when policy makers decided to manipulate exchange rates. The strong yen (endaka-heavy yen) policy of the Plaza Accord in 1985 sent both the yen and the Japanese stock market higher. Similarly, the Clinton administration’s decision to support the value of the dollar in the spring of 1995 lifted both the dollar and the USA stock market.
  2. Underlying fundamentals in both countries, such as an investment boom with its accompanying productivity gains and the longevity of the economic expansion, gave confidence that the overvaluation of the stock market was justified. There was a belief during both bubbles that the respective economies were undergoing a transformation and that they were entering a new era.
  3. Central banks (BOJ and FED) maintained aggressive support operation of their respective stock markets to bail out large failing institutions or speculators. Price Keeping Operation’s (PKO’s) added to the ‘irrational exuberance’ of market participants and created a moral hazard.
  4. The current supposed prosperity in the USA is a false prosperity as was the one during the Japanese bubble. Rising wealth inequality, an increased workload, a diminished quality of life and a two-tier economy of beneficiaries and non-beneficiaries characterized both bubbles. It is hard to fathom, but during the supposed prosperity period, 40% of the populace in Japan and the USA experienced net worth declines.
  5. Un-elected career bureaucrats in Japan’s MITI and MOF and the USA’s FED, fueled the bubbles in both countries.
  6. Democracy was hijacked in both countries by an iron triangle of bureaucrats, elected politicians and big business. They were able to do this by focusing the national psyche on their countries economic accomplishments rather than on the overall well being of its citizenry. In Japan, the focus was directed toward the economy while in the USA the focus has been the stock market. A policy of economic nationalism that absorbed all the country's resources was created.
  7. Rapid globalization by multinationals (Japan Inc. or today’s American multinationals) was a contentious feature of both bubbles. The rising stock markets in both countries provided companies with opportunities to raise war chests for overseas plunder. While many countries are copying the American model today -- just as they were copying the Japan Inc. model a decade ago – the movement of giant corporations from the U.S. into other countries, influencing their economies as well as their cultures, is detestable to many, and is mistakenly assumed to be the new "American Way," sanctioned by the people. It is not. They do not represent the majority of Americans.
  8. The U.S. has remained an oasis of prosperity in a turbulent world only by siphoning huge amounts of money from around the globe— and this cannot last.
  9. Financial assumptions we have been treating as truths will quickly become false. Corporate balance sheets in Japan appeared strong in 1989,and the assumptions were that they would continue to be rock-solid, but that changed abruptly in a few years. The same flip is very likely to occur here with the budget surplus projections and the level of corporate and individual indebtedness.
  10. The U.S. bubble could out-burst Japan’s given its relatively larger size and the financial condition of its balance sheet, plus our comparatively limited export opportunities. Unlike Japan, we will not have a larger, more stable country waiting in the wings, eager to import our latest technological innovations and give our flagging economy a boost.
  11. To rise like a phoenix and reduce the length and depth of the economic and financial abyss we must learn from Japan’s errors of the post bubble period. We need to rebalance the power base in our country. The United States needs to make radical and bold changes in the way it governs itself and its power structure as it did in the 1930’s. This does not mean big government!
  12. ‘The Japanese Paradigm’ demonstrates that our current monetary regime of floating exchange rates is a miserable failure. The market, contrary to consensus thinking, has been miserable at reallocating resources. The market is not the panacea for this country, and we should not look to a strategy that gives it top priority over other national concerns as a solution. The belief that the market is the end-all of our existence is simply false. We must let this sort of thinking about the market and its ‘invisible hand’ like the Berlin Wall – crumble—and may they rest in peace.

I began the Japanese Paradigm in late 1995 when I was still managing global bond money and it became evident that central bankers were much more successful in resuscitating the US Dollar than I had anticipated. My initial purpose was to analyze the financial bubble created by the Bank of Japan in the 1980's to determine the investment implications for the American bubble.

In 2000 I adapted the Japanese Paradigm to reflect the gross social and democratic imbalances/injustices created by both bubbles. I last tweaked The Japanese Paradigm in the spring of 2001.

At this point in time one should read The Japanese Paradigm as a post mortem of what went wrong, rather than a predictor of future events. This is critical if we are to make a better America and world.

One Wall(Berlin) Down,
One Wall (Street) to Go!

Begin--The Japanese Paradigm

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