There was a time when the military machine of the Communist alliance led by the Soviet Union and trailed by China looked invincible having defeated America, the economic superpower of the day, on the battlefields of a backward land called Vietnam. This prompted the second economic power of the day, Japan Inc, to challenge America's economic dominance of the world. It did so by using the massive foreign reserves it had accumulated over the decades to buy up assets around the world and especially around Asia where it is itself situated and where America is an alien power. The buying of foreign assets being something that America was doing at a much higher rate than anyone else, the American business characters of the Wall Street ilk engineered a bubble to avoid being overtaken by the Japanese newcomers. What they did came to be known as the Savings & Loan scandal whereby they siphoned off nearly half a trillion dollars from the economy of their own country. And they used the money to buy up foreign assets, especially those in Asia which they did in direct competition with Japan Inc. But in doing what they did at home, they also created a gigantic mess, something they left for the government there to clean up and to resolve at the expense of the taxpayers.
The Wall Street bubblites -- as they shall be known from this point forward -- used the half trillion dollars they siphoned from their people to duke it out with the business people of Japan Inc, and they succeeded in reclaiming their title as the biggest investors in the world including Asia, the backyard of Japan so to speak. This challenge, which was fully expected to be honest, prompted the Japanese officials to print as many yens as it took to equal the splurging of the American bubblites, and the rivalry between these two resulted in many countries around the world receiving much needed infusions of cash. Alas, not everyone used the money wisely to develop their own economies along sound principles. But one country that did well and proved to be a wise old country was China which managed to accomplish something truly remarkable. China took the political system it inherited from the communist Soviet Union, combined it with the economic system it was handed by the Anglo-American alliance and created an engine of economic growth the likes of which the world had never seen before. And year after year China ploughed ahead with energy and with vigor in the business of modernizing its economy and distributing the wealth among all its people.
In the meantime, unable to spend abroad all the yens they had printed due to the fact that other countries around the world were running their own presses overtime, the Japanese kept some of the money at home and thus created a local bubble of their own whereby the public was encouraged to invest the extra money they had in real estate assets and in securities. And all the flippers of land and all the churners of stock made it so that the price of a square meter in downtown Tokyo skyrocketed to the million dollar mark, and the index of the Tokyo stock exchange approached the 40,000 level. Then came the inevitable crash to both of them and to everything else; the real estate assets throughout Japan returned to their pre-bubble levels even lower, and the index of the stock market was cut to less than a quarter of its highest high. And of course, the experience was not without consequence because when it came to making any sort of expense after that, the Japanese people went on strike. They refused to open their purses very widely or open them ajar to living expenses that went beyond the absolutely necessary. And they made no investment of any kind no matter how solid the project appeared to be or what sort of return was promised on their capital.
Panicked by the recession and by the falling prices that followed the crash, the government of Japan printed still more money to replace the private money that went on strike and pushed the newly printed money on the economy to keep it moving and thus create the illusion of velocity. But the economy refused to budge because doing quantitative easing, as they called the initiative, was like pushing on a string, they explained. In fact, the money stayed in the vaults of the banks where it was stored because the banks were reluctant to lend it and because very few clients wanted to borrow it in the first place. And all of this reality stood in stark contrast with the Chinese experience because the secret that made the Chinese model work was the fact that no one had to push on a string to move the money through the economy in China. The reality was that the pent up demand for goods and services existed in China and was, in fact, building up for centuries. When the supply came as a result of foreign money pouring into the country, there was no need to push the string at the back end of the economy because the string was naturally pulled up at the front end by the demand that a huge and enthusiastic population was creating. Velocity came to the money supply, and the economic project of China worked like a charm as if it were serenaded by the soothing sound of a billion violins playing a symphony you might call ode to one named Adam Confucius Smith.
And while all of this was happening in Asia, the Soviet Union that straddled both the Asian and the European continents was creating bubbles of its own. But these were not bubbles of the type that are made with good soap or bad economics; they were of the type that are made when something bubbles up to the surface as an old regime dies a quiet death. In fact, the old Soviet Union was dying peacefully and in its place was born a new Russian Federation – no strings attached, not even an umbilical cord. But the strings did surface later on because in order to catch up with the Western economic powers, the Eurasian slouching giant was advised by its friends in America to adopt a system of shocks to the economy. This meant to let loose the characters that became the Russian oligarchs who made the Wall Street bubblites look like infants suckling on bottles of harmless formula. The oligarchs of Russia ended up controlling everything in the Federation including the printing presses of the central bank which they made work without control and made them work faster even than the fall in the value of the Russian ruble which in turn accelerated the running of the presses -- It is a self-feeding vicious cycle, you know. But this was okay with the oligarchs because they were creating quantitative easing of the crazy kind, and crazy economics was the system they were prepared to live with until the rest of the world told them to take that worthless ruble and shove it. The oligarchs read the writing on the wall, saw red with their own eyes and stopped the presses for now. They studied all about how to implement a set of sane fiscal and monetary policies then started the presses again which they ran with a new motor; this time a motor equipped with a mechanism for speed control and a switch that can turn the presses on and off.
As can be seen, the Russian Federation could not have been saved by its own oligarchs, some of whom were sent to spend time in the gulags of Siberia to expiate their sins of unbridled abuse and grotesque exaggeration. Russia was not even saved by the effort of its own government alone but was, in fact, saved with the help of the goulds that live and work in the pits of the Chicago Board of Trade. These characters sent the price of oil up to nearly one hundred and fifty dollars a barrel which made the Russian Federation swim in dollars, in euros and in yens -- being one of the largest producers of oil and natural gas in the world. With this much foreign money coming into the country and with a pent up demand among the public for goods and services that were created and produced mostly by foreigners in foreign lands, the government of Russia did not need to push on a string of any kind to make the burgeoning middle class in the country consume and consume and consume still more. This class and the upper class, all of whom dreamed of living like oligarchs, pulled on the demand side of the economic string and pulled so hard that the string almost broke and the two classes were forced to suppress their hunger for goods and for services, be they foreign made goods or locally produced services which were now available due to the liberalization of the economy. And with this suppression of the demand, Russia embarked on a long journey to acquire the look of a normal consumer society at long last.
And while all of this was happening, a condition was created that almost brought the world economy to a screeching halt but lucky for us, the catastrophe was averted and humanity was able to survive the near meltdown of the economy. A few loose ends still need to be taken care of to give the drama the look and feel of a well polished story, but on the whole, the universe is back again unfolding as it should to paraphrase Desiderata. Let the violins play again.
In the meantime, the quartet of main characters in our soap opera, America, Japan, China and the Russian Federation are back on the stage with a few more characters, all getting ready to play the remaining acts of the piece they call: How to push on a string and get velocity without losing control of the printing presses.
Let them break a leg.