Lawrence, you mentioned the Plaza Accord as a major culprit in the Asian crisis.
The real culprit is James Baker and the Plaza Accord, which distorted the only market indicator (depreciating currencies relative to the greenback) that foretold the Asian model was a road to serfdom. Instead, we unleashed an unparalleled asset bubble whose shockwaves are still being felt.
In an earlier post on another thread you had also addressed this same issue:
But then the Plaza Accord was signed. Exchange rates stopped being rational. The dollar depreciated. The U.S., which was doing fine to begin with, now had an undervalued currency and entered a period of superb internal growth while retrenching a bit from international economic hegemony. The situation in Japan, however, was disastrous. The marketplace signals were all wrong, and Japan Inc. was actually rewarded for pursuing irrational, value-destroying strategies. After all, the yen was rising, wasn't it? Is it any wonder that an asset bubble developed?
Please clarify the mechanism by which the Plaza Accord caused the asset bubble in Japan. Your posts suggest a role played by the rising yen. Was it anything more than a psychological validator or was there some greater cause-effect mechanism in place?
Also the chronology does not seem to match your thesis. The critical phase of the Japanese stock market bubble occurred during the two years that began in Jan. of 1988. It was during this blowoff period that the Nikkei Index went from 21,000 to 39,000. However during this period, the yen actually declined versus the dollar by about a fourth. It was only after the Nikkei began its descent that the yen doubled in value. (From 160 to 80 yen/dollar)
One further point which we have skirted around in our discussions on the "true" value of the yen. You say that the U.S. was doing fine with the dollar at the preposterous levels of the mid 80s. My recollection of the period was that it was a disastrous one for U.S. manufacturers. In my files on the period I have a picture of a Caterpillar worker holding a sign saying "HELP CATERPILLAR, NOT KOMATSU" Of course you know my thoughts on the subject. I believe that the dollar was almost 50% overvalued at its peak.
-Robert
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