Wednesday, February 21, 2007

Misplaced Dominance

Twenty years ago this month, I packed up and moved to Tokyo, Japan when Morgan Stanley (MS) sent me over to help establish a beachhead in Japan and Hong Kong The Japanese economy and markets were the rulers of the roost across the global economy. The opening up of these markets to foreign brokerages was the biggest changes to the financial markets probably since the deregulation of fixed commission in the US markets several decades ago.

MS sent me out for “1 year” and after being there for 3 months wanted me to commit for 2 years. So, I had to adjust my own personal agenda and my wife and I got married in August 1987. We had a delayed honeymoon in November which we took in Bangkok and Phuket, Thailand (before both became popular). In Phuket, at the Club Med we had dinner with 3 other couples – one couple each representing Canada, Australia and the United Kingdom. The discussion turned to the dominance that Japanese companies and individuals were developing over the global economy. The other couples were convinced that Japan would gain control over the world’s economy. I disagreed. I said that if we sat around the same table 10 years before that, the same would have been argued about the OPEC nations with their petrodollars. Perhaps before World War I, the same might have been argued about the British Empire. And so it goes.

Now the same discussion is centering on China. Time and time again, a country’s economy finally begins to emerge and grow at a tremendous pace. These economies will attract and amass huge amounts of capital leading one to the incorrect assumption that they will dominate. On many occasions, the explosive growth is unsustainable and sometimes results in a contraction as we have seen in Japan for the better part of the last 15 years. Japan’s problems and mistakes were too numerous to mention in short order in this blog right here and now. Sometimes, those economies need to grow and fill a void left by the rest of the world. Many might have argued that the US grew too fast after WWI. That has been anything but the truth. However, we did have an awful depression in the 1930s. Considering an economy like China with well over 1 billion citizens, I have to conclude that there is more growth in its future and we are in the early stages of such growth. There will be some volatility along the way. On the other hand, as we saw with Thailand in the 1990s and now with Vietnam, such growth is speculative and unsustainable.

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