Re: Fw: The Biggest Risk to the Global economy in 2002

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

For two years past, I have drawn the attention of PKT to the World Economic
Forum at Davos.  This year the US media has focused on WEF 2002 - Davos in
NY, because it is held on US soil and it have been moved here in response to
events of 9-11.

Davos began building momentum along with the rise of post Cold War
globalization. After 1997, Davos participants were forced to take the
defensive, to argue that globalization was not really the predatory regime
that it actually was, but that the victims of globalization, particularly
financial globalization, were the victims of self-inflicated bad decisions
that the market would not forgive.  Yesterday, O'Neill sounded the same tune
on Argentina.  The real problem of financial globalization, which has
outstripped industrial globalization as a threat to both world peace and
world order, is that dollar hegemony has eliminated the level playing field
for world trade. My view on this issue is well known to PKT list members and
thus need not be repeated here.  Suffice to say that the dollar's role as
the sole reserve currency for world trade has eroded not only the potential
benefits of global trade, but it has also distorted the US economy to a
degree that risks destroying its future.  The strong dollar policy is
sapping the real strength of the US economy, allowing it a false prosperity
on borrowed money and borrowed time.

Now neo-liberals are focusing on Japan, blaming its policies for being
obstacles to their hope, nay, fantasy, of looking to the Asian consumer
market to save the rapidly collapsing global economy.  For almost a decade,
economists and market leaders of all stripes have been giving Japan
gratuitous advice on how to "jump start" its anemic economy. Washington has
shifted from its policy of the Plaza Accord of 1985 to push down the dollar,
primarily against the yen, to the policy of the past few years of a strong
dollar. Yet the US criticises Japan for allowing the yen to fall, which is
the flip side of a strong dollar.  The conventional "snake oil cures", as
the Japanese characterise them, offered by Summers and company, are
absolutely off target as far as Japan is concerned.  I am a specialist on
Japan, not because I have read all the literature written in English on
Japan. In fact, I have not come across any book or article in the West on
Japan that I found worthwhile to read to the finish.  I grew up in a
household where Sino-Japanese relations had been dinner conversaation for
three generations, and many members of my family have played leading and
critical role on the issue.  Prior to normalization of relations in 1973,
Sino-Japanese memorandum trade was governed by the L-T memorandum, the L of
which is my family name.

Japan has never been part of the Western economy, bespite effort to morph
Japan into a charter member of the G5.  Japan was officially invited to be
an integral part of the West, the way South African apartheid categorized
the Japanese as "hororable whites".  Economic sucess has gained the Japanese
the privilege of not remaining Japanese or Asian. During the Cold War, Japan
revitialized its war torn economy by gaining a speical export liscense from
the US in exchange for continuation of US military bases in Japan.  The
Japanese economy benfitted from the Korea War and the Vietnam War.  One of
the collateral effect of the Vietnam War was the massive export of inflation
from the US to Asia.  The Vietnam War took place in the most fertile food
producing region of Asia, causing food prices to rise contiuously for a
decade and turning Asia into being a dependent of US agriculture. The
Vietnam War taught Japan that its historical focus on SE Asia as a supplier
of food for its population could be replaced with Western agribusiness,
including the US, Canada and Australia.  Kobe beef, which commands prices
ten time higher that of US prime meat, was cut from cattle fed with US corn
and with beer made from US wheat.  Post WWII Japanese export was classic
mercantilist, earning dollars backed by gold until 1971 when Nixon took the
dollar off gold.   There after Japan found itself earning dollars that fell
in value faster the Japanese could spend them. Thanks to gurus such as
Herman Kahn, who, thinking about the unthinkable, saw Japan as the new
superpower, Japan was beginning to develop a declusion of grandeur,
fantasizing that manufacturing automobiles, buiding ships and producing
electronic consumer gadgets were new paths to national glory, while the US
was investing its resources on high technology, in operation research and
command and control inovations, mostly in the not-for-profit military
sector. Post War Japan failed to develop a financial sector in the Western
sense. The Japanese bank system was a funding arm of MITI's  industrial
policy, which post-war geo-politics forced Japan to be satisfied with low
tech manufacturing.  Japanese banks served Japanese national policy
efficiently for several decades, until finance globaliztion, which came with
the BIS's Basel Accords which require the world's banks to meet capital
requirement and to obey BIS definition of NPLs (non-performaing laons).  The
Japanese banks today are not in worse shape strucutrally than they had been
for five decades.  They suudenly look bad because non-Japanese regulations
are now forced on them through the Basel Accords and NPLs have to be written
off and high capital requirement met.   In other words, Japanese banks now
must be a profit centered sector on its own rather than the traditional
funding agency function they had been.  This is problematic in the extreme,
because Japanese banks were both investors, lenders and marekt share
expediters for Japan Inc.  Japanese industries and trading company have been
able to compete and win primarily because their banking arms are part and
partial of of their operation.  US corporation always envy their Japanese
cometitors, because US banks could not legally support them with high risk
lending and below market rates.  All over Asia, US corporations always came
in with unsucessful high bid because their cost of fund is inevitably double
those of their Japanese competitors.  Mitsubishi is both a bank, a trading
company and a manufacturer.  Enron was as close to a Japanese model as an US
corporation could get, and of course, Enron violated wholesale US law and
regulations in the process.  GE failed to clear the EU anti-trust hurdle
primarily because of its incestuous linkage between credit finance, leasing
of aircrafts and manufacuring of engines.

It is not possible for any Japanese political leader to truly "reform" the
Japanese economy unless he plans to negate all that Japan was since WWII.
Besides, as I have pointed out before, the LDP enjoys one party rule in
Japan, not much different than the CPC in China.  Thus if Goldman Sachs is
waiting for Japanese reform to save Asia, and therefore the US and the EU,
from protracted recession, it has a long wait.  The fact of the matter is
that the Japanese have figured out a strategy to sustain near permanent
recession.  It is waiting for the US recession to unfold to restore the
level playing field destroyed by dollar hegemony.  The fact of the matter is
that as long as Japan can still export to US markets, no domestic reform is
either necessary or possible.  That goes to most economies outside the US.
Thus the biggest risk of globalization is not a Japanese melt down, but the
inevitable shut down of the US market for imports.  When that happens,
globalization will come to a stand still.  Nations will turn inward for
development and trade only if they need good and services not availble
domestically, but not for financial gain under a regime of dollar hegemony.
It may not be the dark age revisited as the neoliberals warn.  Perhaps
finally, when nation tend to domestic development as a priority, away from
senseless export merely to service foreign loans denominated in dollar,
children around the world will begin to eat decent meals and enjoy basic
health care and edcuation. What does it matter if the DOW and the Nikkei hit
3000?

Henry C.K. Liu

John Gelles wrote:

>         Thanks again to Jozef Imrich for the article below
>         this message.  It's about the WEF.
>
>         My comment relative to the article is:
>
>         The answer to Japanese debt is for their government
>         to buy it all at par and stick it away in a ledger.
>
>         This may inflate the yen and require the US and
>         other producers to grant credit to China and India
>         to get in on consumption of all the output ready to
>         be produced.
>
>         If the O'Neil remedy is to destroy Japanese banking
>         and production as punishment for producing world
>         class products, I say Japan should just follow
>         my advice and grant credit itself to China and India
>         to buy what Asia is able to produce. Its time to
>         to tell the neoliberals to go to hell.
>
> ----- Original Message -----
> From: Jozef Imrich <chezimrich@xxxxxxxxxxx>
> To: <VOW@xxxxxxxxxx>
> Sent: Friday, February 01, 2002 4:56 AM
> Subject: The Biggest Risk to the Global economy in 2002
>
> WORLD ECONOMIC FORUM Japan's Woes Cast Pall Over Forum
>
> Alan Friedman (International Herald Tribune Friday, February 1, 2002)
>
> 'Biggest Risk to the Global Economy in 2002,'
>
> Financier Says NEW YORK International financial leaders are growing
> increasingly concerned about Japan's huge debt and dire economic
> condition, even to the point of suggesting that further deterioration
> could trigger global financial instability.
>
> "It is not an exaggeration to say that this is the biggest risk to the
> global economy in 2002," Kenneth Courtis, vice chairman of Goldman Sachs
> Asia, said at the start of the World Economic Forum meetings here. "It
> would be naïve to expect that the unwinding of a crisis of this
> magnitude would not generate vast global volatility," he warned.
>
> Japanese officials arriving at the forum bore grim economic news.
> Hidehiro Konno, deputy minister for international affairs at the
> Japanese Ministry of Economy, Trade and Industry, admitted that his
> country's economy had not "hit the bottom yet." Mr. Konno acknowledged
> in an interview with International Herald Tribune Television on Thursday
> that the government's forecast of zero growth in 2002 may be optimistic.
>
> Mr. Konno then sidestepped serious concern about Japan's economic
> prospects, insisting that macroeconomic projections mattered less than
> the ability to carry out reform policies.
>
> "The numbers are not important, I think. The most important thing is our
> resolve to work through the reform program," he said.
>
> But many bankers and economists doubted that Japan - in particular,
> Prime Minister Junichiro Koizumi - had the political will to dispense
> the tough medicine needed to fix the economy. The sense of participants
> here at the forum, including those who asked to remain anonymous, was
> summarized by the outspoken Mr. Courtis.
>
> "I think the international community should see this for what it is," he
> warned, "and that is the biggest economic and financial crisis in any
> major economy since the 1930s. And the crisis is not just economic and
> financial. It is fundamentally political and resides in the inability of
> Mr. Koizumi and of Japanese society to make decisions about its future.
> The vested interest in the status quo remain powerful, and so no real
> decisions are being made."
>
> A number of financial experts argued that Mr. Koizumi, despite his
> popularity, may not be able to match his bold reform rhetoric with
> action because he is still a prisoner of the Old Guard of the dominant
> Liberal Democratic Party governing coalition.
>
> "What is really going on," said Carl Weinberg, chief economist of High
> Frequency Economics, "is a process of denial and benign neglect. I think
> the Liberal Democratic Party is unable to accept the responsibility for
> the mess in the financial system and has adopted a policy of inaction in
> the face of a deteriorating financial system."
>
> Mr. Courtis and others attending forum, said they expected Standard
> Poor's and other credit rating agencies to downgrade Japan again,
> exacerbating the country's financial problems.
>
> "There is a Himalaya of debt that is crushing the economy at a time of
> recession and deflation," said Mr. Courtis. "We have never seen a debt
> level this high in any country at any time in history."
>
> Standard Poor's said Thursday that more delays in Japan's economic
> reform program could lead it to downgrade the country's sovereign rating
> for a third time. S&P twice downgraded Japan last year. "With total
> outstanding government debt expected to reach 140 percent of GDP in
> fiscal 2002 (ending March 2003), further delays in either structural
> reform or economic recovery will increase the possibility of another
> sovereign downgrade," S&P said in a statement.
>
> The rating agency published a report Thursday, called "Japan Credit
> Trends 2002: The Downside Deepens," in which it stated that "economic
> stagnation has evolved into a worrisome deflationary recession, with no
> signs of an upturn for the foreseeable future."
>
> Mr. Courtis said that bad debts in the Japanese banking system could
> amount to more than 25 percent of the country's entire GDP while he
> expected total government debt to rise to more than 150 percent of GDP
> next year.
>
> "The bad debts in the banking system are so high that the government is
> going to have to fill the hole. Plus you have to add government debt,
> insurance company loans, commercial paper and bonds," Mr. Courtis said.
> "The level of debt makes Enron look like nothing."
>
> For his part, Mr. Konno conceded that the mountain of bad debts held by
> Japanese banks "are a drag on our economy."
>
> He noted that in the past three years Japanese banks had written off bad
> debts equivalent to 8 percent of Japan's gross domestic product.
>
> But while the Koizumi government had put pressure on banks to write off
> nonperforming loans, Mr. Weinberg contended that it was "not enough to
> solve the problems - and that is because to do so would bankrupt some
> very big banks, and that is politically unacceptable in Japan."
>
> The real problem, Mr. Weinberg contended, was that "Mr. Koizumi is not
> an LDP insider and the people who really run Japan are the backroom
> insiders from the LDP."
>
> Mr. Koizumi may be popular, he added, "but he lives at the pleasure of
> these people and cannot force the kind of changes needed, because he
> doesn't have the power."
>
> The firing of the Japanese foreign minister this week by Mr. Koizumi was
> described by conference participants here as more evidence that the
> prime minister must still defer to older party hacks and the powerful
> and entrenched Japanese bureaucracy.
>
> Mr. Courtis and others said they agreed with calls by Paul O'Neill, the
> U.S. Treasury secretary, and by senior officials in China and South
> Korea for Japan to not use a weakened yen as a way out of its problems.
>
> ========= end of article ========