By Henry Oliner
After the oil embargo in 1974 (as a result of the US aiding Israel in the Yom Kippur War- so much for the myth that we only fight to protect our oil) the Arab world ruled the roost – for a while. Oil sheiks bought prime real estate and tipped clerks at Harrod’s in London with $100 bills.
But eventually even the greedy oil sheiks wielded to market forces, OPEC came apart and oil prices plunged. The 1970’s was the decade of Arab oil wealth.
During the 1980’s Japan began to rule the roost. Japanese investors bought prime US real estate at high prices. Japanese manufacturing buried its competitors. Business books hit the stands heralding the genius of Japanese culture and business practices. Mutual fund families added Japanese sector funds.
But the Japanese miracle was over blown and at one point the Nikki dwarfed the Dow 30 in a way that made absolutely no sense. In the 1990’s the Japanese economy and market fell like a rock and stayed down for a decade and was only recently starting to recover.
During the 1990’s the American markets were the champion with the Dow rising from the 3,000 area to over 12,000 largely on the backs of the high tech sector. Words like ‘new paradigms’ tried to make the case that things were somehow different and that things like making a consistent profit did not matter any more.
Of course we realized otherwise.
More recently we have been captivated by the Asian miracle in China. Their demand stoked commodity markets driven by double digit growth rates. Record high commodity prices were spoken of as if they would be permanent given the insatiable Chinese and then the Indian demand for industrial growth.
One again we realize that nothing grows forever.
Now with a domestic stock market down 40% and world markets collapsing together, investment thinkers stay committed to an investment model driven more by statistical history than empirical sense.
The burst of the consumer housing and credit bubble is in sync with a bursting of a commodity and oil bubble. It will not be a quick turnaround but a slow grinding from a credit quagmire. The real answers are too painful for many entrenched interests.
Such as that we must become much more focused on producing than consuming, litigating, and redistributing. Margaret Thatcher once warned that the problem with socialism is that you eventually run out of other people’s money.
Wealth must be produced and we face a reminder that it is not produced on Wall Street or K Street. The world of finance and politics shuffles money around from one pocket to another. They may lubricate the engine, but they are not the engine.
But at some point someone has to make a product or provide a service somebody wants. Somebody has to deliver, warehouse, maintain and sell that product or service. Financial markets are important to maintain the flow of capital and trade but when it dominates the economy instead of serving it then we are out of balance. The financial sector needs to shrink and it is.
We must also remember that the government makes no product, and creates no jobs regardless of what they promise. When the government, like the financial sector, gets too big as a percentage of the GDP then we are again out of balance and we will face a similar reckoning.
If we are to avoid the long drawn out recoveries of the previous busts we must focus on the producers. This means lower taxes, less regulation and litigation, free trade, and a sound currency.
This is a policy that is largely the opposite of what is being proposed in our new Congress and Administration.
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