|Forecasting America's Destiny ... and the World's|
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The Tokyo Stock Exchange (TSE) suffered a major crash in 1989, and has been falling ever since. However, the Japanese economy as a whole has never suffered many ill effects from this crash, puzzling many experts.
As you can see from the adjoining graph, the Nikkei stock market index was at around 40,000 in 1989, following a large bubble that began in 1985. The TSE crash began in January, 1990, and has not ended to this very day, 13 years later.
This should have caused numerous business failures, resulting in a major depression, but this hasn't happened. Why not?
A new analysis of the Japanese economy provides the answer. By examining data from thousands of companies, the researchers uncovered a consistent pattern of Japanese banks loaning massive amounts of money throughout the 1990s to firms that would otherwise have gone out of business.
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"The glue holding stock prices together in Japan has been copious lending by banks at ultralow rates, allowing even nearly insolvent companies to survive for years," according to the findings.
These loans have been possible because of the nature of the Japanese banking system, which essentially guarantees that the government will prop up any bank that otherwise would fail. The loans have permitted very weak companies from failing, and have also put many banks themselves into near insolvency. In fact, several major banks did fail in November 1997 and early 1998, and they were nationalized and saved. Since that time, stock prices on the TSE have been showing a remarkable volatility, very similar to the volatility of the New York Stock Exchange in the Great Depression of 1930s, but unlike anything seen since then.
The report indicates that time is quickly running out. More banks are approaching insolvency, and cash reserves are running out. This indicates that a major business collapse in in the offing for Japan.
Generational Dynamics predicts that every society will go through a major financial crisis every 80 years or so, and this will coincide roughly with that society's crisis war. A crisis war and a finance crisis feed on each other, each making the other worse: A crisis war makes people risk-averse, unwilling to make purchases or investments, resulting in a worse financial crisis, and a financial crisis makes people angry, looking for justice and retribution, which results in a bigger crisis war. Generational Dynamics predicts that America, Europe amd Japan are now headed for a new major 1930s-style depression, along with a new world war.
The researchers do not indicate that they've found any policy chances that could save Japan from depression, and in fact hint that such a depression is inevitable. However, there is little doubt that a major financial collapse in Japan would trigger a similar collapse in the United States.
Generational Dynamics predicts that the Dow Jones Industrial Average, currently hovering around 8000, will drop to the 3000s or 4000s some time before 2006, and will not go above 6000 again until after 2015.
Source: The study, Idiosyncratic Risk and Creative Destruction in Japan, by Yasushi Hamao of the University of Southern California's Marshall School of Business, Jianping Mei of New York University's Stern School of Business and Yexiao Xu of the School of Management at University of Texas at Dallas, can be found at http://www.stern.nyu.edu/fin/workpapers/papers2002/html/wpa02053.html. The PDF file for the study can be found at http://www.stern.nyu.edu/fin/workpapers/papers2002/pdf/wpa02053.pdf.