THE LESSON NEVER LEARNED (Written in October 1998)

The last recession was in 1992. At that time these recessions were called ‘slumps’ and later ‘depressions.’ The government at the time referred to it as a ‘temporary economic downturn,’ which seems to indicate that if you rename an unpleasant fact of economic life each time it re-occurs the politicians can pretend that first, it doesn’t exist, and when this denial becomes absurd they can assure the people that it is not nearly as bad as its predecessor with a different name. Whereas, in fact, the 1992 recession was the worst and longest one for over sixty years. As a result the London and Dockland’s constructions have totally overshot demand and there were over forty million of square feert of unlet office space in these two locations; and property companies were going into liquidation.

That was only one example of the mad, dogmatic Thatcher years of leaving everything to ‘market forces’ and ignoring the rudiments of planning supply to match demand. By the time these so-called infallible market forces have adjusted to an equilibrium, a whole society can be wiped out as uncontrollable unemployment is the price to pay. No lessons are ever learned permanently by society. Lessons are learned in the short term as the consequences stay on in living memory, and the people are cautious about repeating past mistakes that led to inflation or unemployment. But once the lapse between these events is such that they can be looked upon as historical and not contemporary or the recent past, then the new generation of politicians maintain, ‘they didn’t know how to deal with these situations in those days and we now have the expertise and knowledge that they didn’t have.’ And then they proceed to lead the people into the same errors of the past.

There is really only one thing that history teaches us and that is that people and societies never learn from the errors and mistakes of the past.
And now, in 1998, the new global financial crisis gathers apace. Last Autumn the Thai currency came under pressure and in a short time the currencies of South Korea, Indonesia and Malaya followed suit. There was a resultant flight of capital from these countries as they devalued and their stock exchanges plummeted. Their currencies had been pegged to the US$ which had encouraged the global investors into these countries and now, with devaluation, they became less desirable locations for the Western investment institutions. Pegging their currencies to the US$ dollar had been the West’s strategy for ensuring near risk-free investments into these countries. The bait to get them to rashly risk pegging their currencies had been the promise of inclusion into the ‘big boy’s club’ where their financial institutions would rank on an equal basis with the rich G7 countries. In other words they would have access to the free, global market. More to the point was that the free, global market would have access to their economies and such was the apparent success of the strategy that the Pacific Rim countries became known as the ‘Tiger Economies.’ Speculative money poured in, more than they could ever hope to cope with, and the bubble burst.

A similar scenario had occurred in Mexico a few years earlier and the US had bailed out this country’s economy in order to protect the mainly US investments there. Now was the turn of the Tiger economies to be shored up. This time it was through the auspices of the International Monetary Fund and the World Bank and many billions of dollars were rushed to the rescue. The objective of course was to allow the Western banks and investors to get their money out. The damage had been done however and, as far as the local economies were concerned, the bail-outs were mere palliatives, enough to save the international stability, but not enough to save the individual country’s economies which suffered various degrees of contraction, the worst being that of Indonesia where the corrupt President Suharto was deposed.

More disasters were to follow, although in the case of Japan ‘follow’ is scarcely the right word. ‘Continue’ would be a more apt word. Japan has been in trouble for many years and the economy finally plunged into recession in 1998, this year. Japan has the odd distinction of being the worlds’s biggest creditor and biggest debtor at one and the same time. It has invested internationally and borrowed nationally and it will be an interesting lesson in economics to see how this unravels in the years ahead. Russia defaulted on its short-term bonds and is now virtually bankrupt. The standard of living has dropped since they changed from Communism to Capitalism and the life expectancy of its people has dropped as well. It either had to default on its re-payments to the Western bankers or see its people starve. And Brazil started to slide to the brink of default. The rising tide of a global financial collapse lapped around the Capitalist citadels of North America and Western Europe and people wondered whether we would be able to weather the storm.

It was when the news broke of a Hedge Fund called the Long Term Capital Management Fund having to be bailed out by a rescue operation brokered by the American Federal Bank in which several international banks were called on to contribute collectively somewhere in the region of 3.9 billion dollars that I was convinced that there would be no escape in the years ahead for the West. A day of reckoning would have to follow this stream of disastrous news. Hedge Funds were little known by the public and are, in effect, a different form of crony capitalism, as practiced by the West. High placed officials in government-supported banks collude with government officials and certain investment institutions to try and ensure their investments are as risk-free as is practically possible. This is by having prior information from the top about capital flows and political decisions. The particular Hedge Fund that failed had ratcheted up a leverage rate of 250:l (for one dollar of capital they had 250 dollars invested). They claimed that this was possible by means of using a risk-free formula worked out by ‘brilliant’ Nobel prize-winning mathematicians on their pay-roll. The Russian default finished them off and their risk-free formula was blown out of the water with later revelations showing that they had been running what was scarcely more than a casino based on insider information. as revealed in Susan Strange’s book, ‘Casino capitalism. As this is all going to have to be paid for by the little people of the world, many millions of whom have already started to suffer in the Far East and Russia. Of course, some areas like Africa have already been bled dry by Western Free Market Capitalism years ago.

(11 years later in March 2009 with the Credit Crunch of 2007 now a fact of life and neo-liberalism as the system became called, having failed as conclusively as Communism had two decades earlier, the above came true; The century long battle between these now, two failed ideologies has shown the folly of following power to the abyss and will cost the West dear; the people in the Far Eastern countries will be having the last laugh).

October 1998