Back in the Sixties, I sat in wonder as a young financial genius explained the magic of “leveraging.” From what I was able to gather, all you had to do was get hold of a hundred dollars and use it as security to borrow a thousand dollars, then use the thousand dollars to borrow a million, and so on…
I didn’t think the system would work – at least not for long. And it hasn’t. The global economy is in chaos today because too many financial geniuses believed in the magic of leveraging.
Capitalism is based on the reasonable assumption that you can borrow a million dollars and pay it back with interest if you invest the money in the right way. You might even make a few dollars for yourself in the process. The trick, of course, is figuring out the right way to invest the borrowed money. And it seems few individuals or corporations have been able to do that recently. So, it looks to me as if governments will have to step up to the plate. And across the globe, voters seem to be agreeing with me.
That’s the message I’m getting from such events as the general election in Japan on Saturday. The “center-left” party scored a crushing victory, ending a half-century of domination by the “conservatives.” In politics, words do not always mean what you might think. “Center-left” is media speak for policies designed to make life better for the mass of the people, and “conservative” means doing the bidding of Big Business and hoping some of the profits will trickle down to the rest of us.
Japan’s voters ignored warnings that the “Robin Hood” policies of the “center-left” would undermine the country’s industrial competitiveness and destabilize its finances. I suppose that could happen, but “Robin Hood” policies are working pretty well in Canada and the Scandinavian countries. So I am optimistic about Japan’s chances of economic recovery. I think the Japanese are perceptive and disciplined enough to understand what’s going on and to accept the bumps along the way as the country’s economic priorities are adjusted.
The same kind of thing is happening in America, but the American public is far more fractious than the Japanese. A lot of Americans aren’t willing to accept change. They want “their America” back. You might remember their America? When what was good for General Motors was supposedly good for the country? I hate to disillusion these protesters but that America is gone forever.
For one thing, the American consumer is changing. With high unemployment and shrinking income, and with household debt at scary levels, Mr. and Mrs. Consumer are getting a lot more cautious. They’re saving more and shopping less. And when they shop , it’s mostly in the bargain basement.
I’m sure you know that America’s prosperity has been based for decades on “consumer spending.” The country produced less and less, spent more and more, and somehow that translated into more cash in everyone’s pockets. But you know that kind of shell game can’t last forever. Sooner or later, somebody is going to have to produce something of value.With private investors pouring their capital into unproductive enterprises based on manipulating money instead of using it to produce anything, and with the manipulators skimming off an obscene share of the proceeds, the American economy had to crash. And if there is no change, it will crash again.
The country’s only hope is investment by the government in projects that create returns. Some investments must be long-term – education, infrastructure, health care, the environment, research… Others must produce dividends much more quickly. That means government investment in productive projects – rebuilding the nation’s power grid to jump start a green economy, for example.
Some people call this Socialism. I say tell that to the voters in Japan.