Tuesday, October 30, 2001

Remora
Limited Inc remembers with fondness Halloweens of yore - the costuming, the secret hurling of rotten eggs at the neighbor's prize Oldsmobile, the decorative touch with dog turds flambee and the ringing of the doorbell, giggles in the dark as we ran to the bushes -- such, such were the joys. But this Halloween we want to give our readers a special fright, some horror they can treasure up for the golden years. That is why we recommend this article by Kenichi Ohmae in New Perspectives Quarterly. The undead, monsters reassembled out of corpse parts, mad knifethrowers, phantoms of the opera, they might give one the ephemeral tingle, but there's nothing like sober economic statistics to bring on a dead faint and heart palpitations. The article is a scathing survey of the financial sleight of hand by which the Clinton administration contained infection from the Japanese slump. Old Doctor Bush, our cornpone POTUS, has poo-pooed the old Clintonomics, and, according to the article, he's about to get a big surprise. His advice amounts to the standard boilerplate about letting the marketplace sort out the dead from the living, the bankrupt from the solvent. The gov, in this view, should stand back and let unemployment do what it will, in order to have a healthier tomorrow. Well, Ohmae points out, lets say the Japanese government actually pays more than lip service to this insane advice. The zombies among Japanese banks and corporations might not just roll over, but but Doc! they might actually struggle to survive. Eek! Then Daddy Warbucks might have to put on his thinkin' cap. You can't smoke capital out of the holes, unlike terrorists, and since he has a complete moron for a Treasury secretary (did Limited Inc say that? Apologies all around. Not a COMPLETE moron. Really, what were we thinking?), we shouldn't expect common sense from that quarter. Well, in that potential struggle, these moribund investors will need resources, which means pulling massive amounts of capital out of investment positions here in the States. Here are two grafs with some striking claims:

"I believe that the Dow will decrease by one-third from its peak. When the Dow was 12,000, it would have been 8,000 without the influx of foreign capital.

Who will suffer the most?

The capital flight back into Japan will be close to $550 billion, of which $320 billion is in Treasury bonds. The Japanese hold approximately 10 percent of all outstanding US government securities-more than any other single country."

It is a little noted facet of economic theory that sometimes, it pays to be crooked. In the early 90s, American regulators and the Fed knew that technically big banks, like Citicorp, had suffered enough of a loss in the bursting of both the stock and real estate bubbles in the Heimat and the double whammy of the real estate bubble in Tokyo and its collateral effect in emerging markets that they were in default of the rules regulating banks. That is, they had to start monetizing assets in order to maintain balances against debt. But the Fed looked the other way, and eventually the situation solved itself. James Grant has written a nice and disgusted book on this, but it isn't that disgusting. Here we are facing another situation in which the better part of financial valor is to cook the books. We'll see what happens.

Do the numbers, and have a happy and safe Halloween, y'all.

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