I warned you

To those of you who follow financial markets, I’ve got four words to offer: “I told you so.”

This week, the toxic debt in the U.S. financial system, and the near meltdown of markets, is the stuff of global headlines, and even talk at the corner coffee shop. Indeed, Wall Street, New York, and Shirley’s coffee shop, Saipan, aren’t as distant as we think. After all, many Saipan residents have online brokerage accounts, and, in the bigger picture, Uncle Sam’s economic problems are going to rock the entire world’s financial boat.

My outlook hasn’t changed in over a decade, my friends. The U.S. economy will slide down, and, reciprocally, industrial Asia will become the world’s economic center, at least if it doesn’t get fatally scorched by its insanely large holdings of U.S. securities and currency.

The global press is wringing its hands, wondering how “economists” are surprised at this week’s stock market weirdness. Well, I saw it coming, and I warned you.

Here is a quote from my column of June 24, 2005:

“…This is possibly the biggest financial bubble in recent history. The U.S. financial system has become tied to this irresponsibly bloated mortgage bubble, and when this sucker pops, the entire economic orbit of the world is going to start wobbling. ”

* * * *

See? I told you so. It was, indeed, the mortgage bubble that triggered the cascade of related debt woes.

Now, I can’t promise you that the tens of billions of dollars that the U.S. is injecting into the financial system won’t slosh into pushing equity prices higher. When the government starts determining capital allocation, anything can happen in the short run. Maybe the stock market will zoom up again; maybe it will melt down. The short run can, and is, and will be, at the mercy of huge distortions.

But the long run isn’t so foggy, since the basic economic structure can’t be ignored. And this leads from the little picture to the bigger one. We’re simply up against a structure of insanely huge American debt, and insanely large government liabilities for (among other things, since military costs are very high now) the lifetime stream of government entitlements that most of middle America takes for granted now.

This isn’t going to be pretty. But let me say a few more words about the U.S., and then I’ll get back to Saipan’s situation.

America can’t do a Rosie the Riveter routine, roll up its sleeves, and “produce” its way out of this jam. For one thing, so much liquidity was injected into the markets that nothing is worth its true economic value (houses, for instance); markets are distorted to the point of incoherence. Furthermore, the manufacturing base has eroded so far that America now has more government jobs than manufacturing jobs.

Contrast that with Asia. It might have tough times coming on the coat tails of Uncle Sam’s woes, but industrial Asia has the work ethic, the entrepreneurial drive, the market share, the know-how, the ambition, and the intellect necessary to succeed in the long term.

As for Saipan, well, true, Saipan blew it by basing its economy on patronage instead of Asian tourism. But that doesn’t mean that Saipan’s more ambitious folks can’t take advantage of what remains of the private sector. Chinese, Korean, and Japanese managers can be quite helpful in providing inroads and insights into Asia’s markets and economies. The contacts I made in Saipan resulted in work that has ranged from the jungles of Borneo to the board rooms of Tokyo.

Overall, then, this week’s financial news wasn’t really news at all. Well, not news if you’ve been following this column; after all, I warned you.