Rising in the East

What the declining dollar means for Asia

“The world appears to be awakening to the fact that the United States of America has become a crippled giant, economically speaking. Huge debt, kept afloat by ongoing foreign loans, coupled with an overconfident disregard for the danger signs, is a strong indicator of a society on the verge of financial collapse” (Philadelphia Trumpet, Aug. 1997).

Within this context, staff writer J. Tim Thompson drew attention to statements made by French economists within months of the European Union launching its new federal currency, the euro. He highlighted the following statement from a leading British newspaper: “The French say the euro will weaken America by replacing the dollar as a reserve currency. They say it will be more attractive to central banks than the individual currencies it will replace, prompting banks to switch dollars into euros” (Sunday Times, London, May 11, 1997).

It’s happening! Barely six months on from the official issue of euro notes and coinage into daily use within the European Monetary Union (emu) nations, the upstart EU currency has topped the dollar!

With the flip-flop in currency values, there is now a grave risk of capital flight from the dollar to the euro. Sensible commentators see that with the euro overtaking the dollar in value, any further fall in the dollar could turn into a rout, devastating the American economy.

The Financial Times pointed to the euro breaking parity with the dollar as “the final sign that markets have lost faith in the magic of the U.S. economy, which has been the motor of the world economy for the past decade. ‘This is the final nail in the coffin of the new economy,’ said David Bloom, currency strategist at hsbc in London’” (July 15).

But this is just a forerunner to a much more worrying scenario.

The Trumpet forecast five years ago, “There is a financial mechanism coming into play which is much like a spring-loaded trap. Japan will probably abandon the dollar in the near future, sending it into an accelerating downward spiral toward worthlessness” (op. cit.).

And there are already in evidence the beginning rumblings of such a phenomenon! “Europe, and possibly Japan, will stage a comeback to dominate the world economy in the near future, a leading German business consultant predicts. ‘The U.S. economy is actually in a very dangerous situation,’ warns Roland Berger, chairman of Roland Berger Strategy Consultants. ‘International investors are shying away from the United States’” (Japan Times, July 22).

The Japan Times continued to quote Berger as saying, “The U.S. economy is, at the moment, suffering the consequences of complacency, arrogance and greed they experienced in the ’90s. The morale and credibility of the U.S. economy is fading …. Japan can play a major role in the next decade” (ibid.).

In the meantime, speculation is emerging that China may lead the way toward the establishment of an Asian currency system pegged to the Chinese yuan. The unpredictable element in this equation is Japan.

Yen Power

As June drew to a close, the Bank of Japan joined with the German-influenced European Central Bank (based in Frankfurt) to prop up the ailing dollar. This shows that despite inherent structural weakness in its massive economy, Japan still has powerful clout in international financial markets. But what will be interesting from here on, as the dollar’s heyday wanes, is the prospect of Japan being lured away from alignment with the EU. As global markets find their feet amid diminishing U.S. economic power, China will seek to draw Japan into its orbit so as to give more immediate strength to the prospect of developing a common currency for Asia.

Historically, tracing back to ancient times, there has been an affinity between Germany and Japan. This reached its most destructive peak during the alignment of the German and Japanese Axis of World War ii. Yet, with Catholicism taking a far higher profile within Europe today, it may be that Japan ultimately finds a more comfortable fit with the Eastern culture of China and its oriental, South Asian neighbors.

The prophecies of Ezekiel 38 and Revelation 20 show that Japan will be aligned with China and the other representative nations of the “kings of the east” (Rev. 16:12) at the time of Armageddon and beyond. Having this in mind, it is intriguing to watch the Far East as China races to replace the U.S. as the main economic power in Asia.

Japan is still in an economic straitjacket. Its traditional culture causes market inertia by drastically slowing the restructuring initiatives sorely needed to adjust to the new globalism.

However, Japan has one great advantage that stems from a particular cultural and ethnic proclivity. The Japanese mind seldom innovates, but it is the world’s expert in taking Western inventions, improving them markedly and selling them back to the innovator as products far superior in nature and quality to the original product. Witness the quality of a Lexus automobile compared to a Cadillac.

More importantly, the potential for this phenomenon to aid Japan’s ailing economy—at the expense of a U.S. distracted by terrorism, bamboozled by crazy weather, frustrated by turmoil on Wall Street and self-condemnatory of its big business practices—is most significant. Japan is in a position to seize the technological advantage over the U.S., as the one thing Japan has is plenty of cash for internal research and development—something sadly lacking in the U.S.’s bloated, credit-driven society.

This point was highlighted recently in a New York Times report. “A Japanese laboratory has built the world’s fastest computer, a machine so powerful that it matches the raw processing power of the 20 fastest American computers combined and far outstrips the previous leader, an ibm-built machine. The achievement … is evidence that a technology race that most American engineers thought they were winning handily is far from over” (April 20).

Senior Yale research scholar Immanuel Wallerstein, commenting on the Times article, contrasted the scientific and technological priorities of the U.S. and Japan in this singular instance and its reflection on the current foreign policy and economic goals of each. “The Japanese machine is built to analyze climatic change, but U.S. machines are designed to simulate weapons. This contrast embodies the oldest story in the history of hegemonic powers. The dominant power [in this instance, the U.S.] concentrates (to its detriment) on the military; the candidate for successor concentrates on the economy. The latter has always paid off, handsomely. It did for the United States. Why should it not pay off for Japan as well, perhaps in alliance with China?” (Foreign Policy, July/Aug. 2002; emphasis mine throughout).

Do we get the connections? Can we see the grave dangers which those warning signs on the economic horizon are signaling? Whole world alliances are changing.

Three-Horse Race

Since, after World War ii, magnanimous America picked Europe up by the scruff of the neck, dusted off the ashes of war and injected massive capital contributions into its Western democracies, Europe has never looked back. Under the guise of a free trade bloc, the current European Union has grown from an initial combine of six nations to the current 16, with more to come. In January, the EU overtook the U.S. economy to become the world’s largest federal economy. It has managed this by taking full advantage of U.S.-led nato power largely to foot the bill for protection of EUinterests.

But history shows that once an economic empire grows to such power, it soon starts feeling the need to secure and protect its global interests by developing its own security and defense forces. Thus it is that we see Europe building its own military force.

Meanwhile, China stands to gain powerfully from having pegged its currency, the yuan, to the dollar, as the following predictions from Stephen L. Jen, chief currency economist at Morgan Stanley, indicate. “If Beijing continues to tie the yuan to the dollar, a depreciating dollar won’t slow U.S. imports from China, says Jen. Nor is it likely to narrow America’s trade deficit with China, the largest for the U.S. among its trade partners in 2001.

“And riding the depreciation of the dollar, China’s exports to the rest of the world will become more competitive as well. After the U.S., China’s biggest destinations for its goods and services include Japan, South Korea and the euro zone. … The stronger currencies will only add to China’s already growing global trade surplus.

“Jen forecasts a 20 percent depreciation in the dollar by the end of 2003. If that is matched by a similar decline in the yuan, China’s improving trade balance might not be the country’s only bright spot. More foreign corporations may take advantage of the weakening yuan and already inexpensive cost of labor, sending even more business China’s way” (Business Week, July 8).

So, here’s the current scenario. It’s simply a three-horse race to fill the impending dollar gap—Europe, China and Japan.

The depressed dollar has contributed to lifting the value of the euro to becoming a prime competitor for foreign capital investment. It is precisely such investment that the U.S. economy currently lacks—witness the poor Nasdaq performance over the past two years. Europe, struggling to come out of recession, has been given a psychological boost by capping the famous greenback with the brand-new euro in quick time. “Symbolism is important in the currency markets and euro parity with the dollar is the biggest symbol of all” (Financial Times, op. cit.).

Stimulated by the euro’s apparent success, the Asian nations may now step up their efforts to create an equivalent to emu, with the prospect of competing on a more level playing field with the euro and the dollar (see article at right).

Global Economic Upheaval

“Do we begin to catch a glimpse of imminent global economic upheaval? Can we see the competitive spirit with which the euro is being implemented? Can we see how the pullout of Japan as America’s financial underpinning could open the door for the euro to become the dominant international currency?” (Trumpet, op. cit.).

Initial signs are not good if we are looking to U.S. leadership in this economic quagmire. In his recent summation of fiscal America, the Fed’s Alan Greenspan talked up the economy, avoiding any statements that might stimulate more negative sentiment on Wall Street. The Fed’s and the U.S. administration’s view is predicated on one singular assumption: “The foreigners can’t sell U.S. assets. The entire world economy depends on Americans’ ability to continue spending money they don’t have. For it is Americans who buy the world’s production. America is the world’s biggest consumer. If it ever stops spending … the whole world goes into recession. In short, the American economy has become too big to fail” (Daily Reckoning, March 21).

Well, this scenario ignores the old common-sense adage, the bigger they are, the harder they fall. It ignores the way the human mind works.

Two mental states drive the stock markets of the world—fear and greed. The level of confidence in trading within the markets depends on which of these collective mindsets dominates at any point in time. Often this will bely reality, as the mind of the investor builds a picture based on limited information, emotion and gut feeling to make an investment decision. In other words, it’s imagination that holds the key to investor behavior.

Many an imagination was fed by the deceitful overstatement of corporate profits by some of America’s top companies. Now that the lid is off, a different scenario is imagined by the investor public.

And it now has the inevitable result! Investment analyst Bill Bonner expresses the current economic trends thus: “But both stock market and foreign policy float on tides of fortune. Beneath them run deeper currents of popular confidence. … [T]he currents sometimes shift. It is not man’s power of reason that fails, but his power of imagination. He cannot imagine what will go wrong—until it does” (ibid.).

“A wholesale, unbridled, uncontrollable panic is brewing. This is not just a crash. It’s a threat to our entire future—as investors, as citizens. … But there’s a limit to how much investors can take—an invisible psychological barrier that, once violated, cannot be restored. This generation’s trust in Wall Street—and its willingness to play the stock market game—will have been destroyed forever” (Daily Reckoning, July 9).

About 15 years ago, Germany and Japan posed a horrifying scenario to America in a bid to scare it into a financial responsibility which benefited U.S. trading partners more than penalizing them. “In the late 1980s, German and Japanese leaders became increasingly bold in suggesting that unless Washington curbed its free-spending ways (and agreed to their wishes in areas like trade) they would slash their financing of America’s debt …” (Current History, Nov. 1996).

As the Trumpet warned fully five years ago, “Time is short (Rev. 10:6; 12:12) and evil forces are at work to bring about the most catastrophic upheaval in the history of mankind (Matt. 24:21; Dan. 12:1). As the parable of the fig tree tells us in Matthew 24:32-35, ‘when you see all these things, know that it is near, even at the doors.’ …

“God reveals that these cataclysmic events are coming, and it appears that all the players have taken their places. Only true repentance collectively can save America from collapsing. Therefore, we must ask, as King David did in Psalm 79:5 and 89:46, ‘How long, O Lord?’” (Trumpet, op. cit.).