KINKY SEX | 1999-05-22
As the Dow Jones Industrial Average broke 11,000, the usual concerns were expressed again - - what is causing this economic boom and how long will it last?
I addressed these concerns before, just after the Dow Jones hit 10,000. I explained where the economic expansion came from on January 16, ("Why We Have An Unprecedented Economic Boom").
What is causing this boom is an old and obvious economic phenomenon: capital expansion. The entire third world, billions of people, is being built up for the first time. This development could have taken place a long time ago, but billions of people have continued to live at a level we would not allow a dog to be raised in because socialist planners wanted to plan for them.
Economic development is not a complicated process. You make something for me, and I give you something for it. To make these things, we need capital. We need money for training, for machinery, for communications equipment and all the rest.
At the end of World War II, Europe and Japan had been bombed out. All their capital was destroyed. They had to rebuild completely. The result was a huge long-term boom, caused by the vast capital flow into Europe and all the tens of millions of jobs that created.
The third world is many times as large as Europe was in 1945. Until very recently, most of the third world was locked into socialist stagnation. Now they are moving toward capitalism. In the past few years, the per capita income of many of these countries has doubled or tripled. For hundreds of millions of people, this requires a great deal of capital.
Five years of simple investment has done more for the people of each of these countries than forty years of planning. And the side benefit has been a continuing boom for us.
You see the results of this phenomenon all around you. Now that socialism is gone, capital is flowing into more and more of the third world. We are producing trillions of dollars worth of capital for billions of people.
The capital expansion of three-quarters of the world will take quite a while. This should be a period of prosperity for decades to come. A person with capital can be very rich in the long run with conservative, growth-oriented investments. My money is in conservative mutual funds, aimed at low dividends and growth.
So the first result of this analysis is that the long-term outlook is excellent. For those with money to invest, this advice: When the long term outlook is like this, one needs to go with the general upward trend. Don't get tricky.
But if this rosy scenario is true, why is it that there have been economic disasters going on all over the developed world? Europe has had massive unemployment for years, and Japan has had a major economic downturn, while Asia in general has had an economic catastrophe.
Europe's economic problems are fairly straightforward. As usual with problems today, they come from policies which are derived from trendy opinion. Trendy opinion says two things: 1) employers must provide lots of benefits for everybody, and 2), all white majority countries must have massive third world immigration. Third world immigration drives down the price of labor. But government policy keeps the price of labor high by requiring a lot of extra benefits for workers. If the price of labor is kept too high for the market, you get lots of unemployment.
So Europe can cut benefits or it can cut immigration.
Europeans want lots of benefits, but they want to keep up with trendy opinion by allowing lots of third world immigration. In the real world, when you do something stupid, you pay for it.
So why, despite the general prosperity, has an economic catastrophe occurred in Asia?
In Asia, the social system which runs the economy is still primitive. Lots of loans and other serious business were handled entirely on the basis of who knows who. Family connections and buddy systems controlled pretty well everything. People concentrated on being liked by the right people.
Business was done on the basis of the buddy system and on the basis of kinship. At the top where the big money was, little attention was paid to real business ability and the ability to pay back loans. The general economic climate was so good that this system went on for quite a while, but eventually it caught up with them.
It's really not much more complex than that.
I wrote about this sort of situation in my article of November 7, 1998, "The Bead Buyers." All this business of loaning money only to your buddies may be referred to as Oriental Wisdom. But it's really silly and primitive, and, as I said before, when you do something stupid, you pay for it.
You hear a lot of wisdom about how to deal in Asia and Latin America. You are told that they don't do business on the basis of your record for making money. We are told, correctly, that they are less interested in serious business questions than they are in getting to know you personally.
This advice is correct. It also tells you something about why those economies are in such trouble. Until grown men get beyond who loves who and start paying attention to business, they are in no position to run a serious and competitive economy.
Oh, by the way, I do remember that the title of this piece was "Kinky Sex." I used to be a college professor, so I know that you have to use a dirty trick like that to get someone to read an article about economics.