The Bears Should Recall Japan
By Gregory Clark International Herald Tribune
TOKYO - As Internet fever escalates, U.S. bears try vainly to ring the
bell by harking back to the 1929 stock market boom in the United States
and the subsequent Great Depression. In fact, they need go back no
further than the 1989 share boom in Japan to find a parallel.
Japan's boom began with rising land prices pushing up the shares of firms
that owned land. Like the Internet boom, in which new share issues
provide the funds needed to boost more share issues, Japan's boom soon
became ahot air tandem act. Speculators rushing to buy more land
pushed land prices up even further, which then gave the rationale to
boost share prices even higher.
Banks added to the circular frenzy by accepting land at inflated prices as
collateral for lending more funds to be used for even more speculative
investments.
Irrationalities and manipulations saw the boom lap over into other stocks.
If shares in Tokyo Concrete jumped, that was reason to bloat the shares
in Tokyo Cake Mix.
At one stage, 40 companies saw their shares almost double on rumors
that they were about to discover AIDS cures, even though most had
almost nothing to do with serious pharmaceutical research. (To this day,
not one of them has even come close to finding a cure.)
And as with the current boom in the Western economies, there was no
shortage of rationalization for the boom. Since Japan was a small island,
high land prices were justified and would continue to rise forever,
boosting the stock market even further.
Or the asset effect of rising land and share prices would boost the
economy to even greater heights, which would then justify even higher
land and share prices. Or, even if the government did intervene to kill the
boom, it would do so in a way that provided a soft landing. And so on.
In fact, even a small intervention was enough to cause a decade-long
collapse.
True, the Internet boom can at least claim the rationale of increasing
overall productivity. But improved productivity does not automatically
create greater profits.
One of the first rules of economics is that profits come mainly from
market imperfections. Under the free competition and free information
provided by the Internet, markets improve and profits inevitably tend to
fall to zero.
Things get even worse with the need for internecine mergers and frantic
spending to create the semi-monopolies that hopefully will guarantee
profits. That red ink from the Internet companies is not accidental. Nor is
it temporary.
Ultimately, the people who gain from the information glut and lower
prices will be the consumers. And they, too, will be crunched by the
eventual collapse.
But, as in Japan, do not expect the market to provide the downturn.
Irrationality can continue to feed on irrationality almost indefinitely.
Booms, once started, can continue far beyond even the wildest hopes of
the speculators.
As in Japan, the collapse will be triggered by rising interest rates. The
speculators will then have a decade to reflect on where they went wrong.
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The writer, president of Tama University in Tokyo, contributed this
comment to the International Herald Tribune. |
